What is compensation management? Tips & objectives

As many as half of US professionals are looking to make a major job change in 2024.* Whether that’s due to a desire for development opportunities, a more competitive salary, or just a position they enjoy more, change is definitely in the air in the job market. 

As a result, many forward-thinking organizations are prioritizing their approach to compensation management when it comes to retaining top performers and staying competitive in their industry when it comes to recruitment.

However, effective compensation management isn’t as simple as deciding your pay ranges, when you’ll give employees raises, and what kind of bonuses you’ll offer. It’s equally key to be intentional and transparent about your decisions, which means carefully considering the “what” and the “why” behind your overall compensation strategy.

This discussion is what motivated us to put together this comprehensive article on compensation management. We’ll discuss what your top compensation planning objective should be, consider expert-informed best practices for creating a compensation management plan, and detail the best compensation management software on the market right now.‍

*Nasdaq, 2023
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What is compensation management?

Many people know what compensation management is but struggle to articulate it. Basically, the definition of compensation management is a process of strategic and administrative responsibilities that are necessary to design compensation packages that attract, retain, and reward top talent. After all, motivation plays a big role in retaining employees.

Depending on factors like company size and strategic goals, an organization might structure its approach to employee compensation management based on a direct compensation model. This model offers a mix of fixed pay and variable compensation, such as employee salaries, bonuses, supplemental pay, and equity.

Other companies, however, conceptualize compensation management in a broader way and take a total rewards approach. This approach includes direct compensation plus an array of employee benefits like health insurance, flexible hours, and expense accounts.
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💡 Now that we’ve defined compensation management, you’ve likely realized how complex and multi-faced it can be. However, you don’t have to tackle it alone. There’s a wide range of dedicated compensation management software out there that makes the process much easier — and we discuss the top ten compensation management solutions available on the market in our comprehensive guide.

😌 Leapsome makes compensation management a breeze

 Explore how Leapsome can help you take a consistent, transparent, and data-driven approach to compensation management.

 👉 Take a product tour

Compensation management objectives

The way your company manages compensation should align with your needs and reflect your specific mission and values. However, here are some common objectives that motivate organizations to devote their time and resources to compensation management.
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Stand out in a competitive labor market

A thoughtful approach to compensation planning will set your company apart in the battle for talent. Forbes recently reported that many US workers are looking for new opportunities that offer higher salaries in 2024 — but another way to get their attention is with generous benefits packages.
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Reward existing employees

Performance management and compensation are often closely linked in employee development frameworks. Common compensation package components like performance-based incentives, bonuses, merit increases, and regular salary increments motivate employees to meet the targets you set together.
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Encourage transparency between management & team members

Publicly publishing your company’s pay range helps avoid bias-motivated income disparities and protects vulnerable people against prejudice during the salary negotiation stage and compensation review process. This is why more and more US states are creating compensation transparency laws.
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💡Pro tip: Salary benchmarking is essential if your organization wants to provide fair pay, remain competitive, and take a data-driven approach to recruitment and retention. Leapsome Compensation recently partnered up with Mercer, the leading industry provider of compensation benchmarking data, so users can seamlessly use that information to inform their approach to compensation management

‍Foster & keep track of pay equity

Pay equity, not to be confused with equity, meaning a company ownership stake in stocks, is when an organization pays employees with the same role equally and in accordance with experience and job performance. For businesses that are committed to diversity, equity, inclusion, and belonging (DEIB), a solid compensation management process is key to staying on top of pay equity, especially as you scale.
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Increase employee performance and reduce turnover

Almost 70% of employees prefer to work for a company that values transparency on topics like compensation management. The reason is that it creates a fairer, more inclusive employee experience and culture. As many professionals cite toxic work culture as their top reason for quitting a job, companies that care about transparent compensation plans will stand out and build a positive reputation in their industry.
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💡 Looking for a platform to help establish and streamline your organization’s compensation management process?

👉 Learn more about Leapsome Compensation.

Tips for effective compensation plan management

An excellent compensation plan attracts the right people to your company and creates more openness and transparency within your organization — but what does it take to create, manage, and maintain one? Here are some of our best-practice recommendations.

⭐ Top tip: If your company doesn’t have a clear compensation management process, consider including it as a goal the next time you create OKRs for your team.

‍OKRs ensure task ownership and offer clear metrics for progress tracking, motivating the team, and driving more results. 🚀

Decide what kinds of compensation plans you want to offer

Your compensation plan for each employee will depend entirely on your business size and growth stage. You’ll also want to consider the aim of your organization’s compensation package.

For example, startups and small companies may not have the budget for high salaries, so they could focus their efforts on putting together a generous benefits package that includes frequent salary reviews and profit-sharing to motivate and fairly compensate all team members. On the other hand, large multinational companies may have the resources to offer pay that’s above industry standard to attract highly skilled, experienced professionals.
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Get clear & specific about your compensation philosophy

Creating a compensation philosophy as early as possible in your company’s journey helps guide all your future decisions around compensation, promotes transparency, and makes it easier to update your compensation policies when needed. A compensation philosophy should explain:

• How your salary structure reflects your business objectives — Imagine you run a software company with a long, complex sales cycle. You might emphasize that you pay your sales professionals salaries in the 75th percentile of the market.‍
  

• How you’ll approac​​h total rewards — Make sure your total rewards plan reflects your company’s mission and objectives. For instance, if you want your organization to be a great place for parents to work, consider including childcare stipends and PTO to care for sick family members as part of your benefits package.‍
  

• How incentive compensation works at your company — This is where you’ll highlight rewarding employees with bonuses and incentives — whether they’re based on time spent with the company or when employees meet specific performance goals
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• ‍How you’ll address in-demand skill sets — Your compensation philosophy should outline what you’ll do when a position becomes hard to fill, whether it’s offering sign-on bonuses or providing above-average salaries for in-demand roles. That way, employees won’t feel blindsided if you have to offer more competitive compensation packages to attract sought-after talent.
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Document & share your compensation policies

Recent SHRM research found that 91% of employees who think their company is transparent about compensation also feel they’re trustworthy enough to make equitable decisions around pay. Why? Because, just as secrecy around pay has a trickle-down effect that foments distrust, transparency about compensation policies lays a solid foundation for a culture of honesty.

Slack’s Future Forum also highlights the importance of transparency. Employees reported they’d be four times more likely to look for a new job in the next year if they felt their leadership was dishonest or evasive when facing challenges or uncertainty.
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⭐Top tip: Consider opening up discussions with team members about how compensation and rewards are tied to performance when you give employee feedback.

‍Have a plan for change

Companies often don’t feel they have all the answers to increasing inflation rates, labor shortages, and how the shift to remote work has changed the conversation on location-based salary packages. So, how do you address these issues with your compensation management strategy?‍

“You don’t just establish a compensation strategy once. Your HR team needs to review its compensation strategy as your business grows and market expectations alter,” says Mike Chappell — COO and co-founder of FormsPal, an online platform dedicated to making legal forms more accessible. 

“The secret is to be open to dynamic changes in the workplace and continuously explore new ways to meet employee needs. HR professionals received a crash education in just how ‘dynamic’ those changes might be in 2022.”

In uncertain times, your plan for market changes must include educating your compensation managers about how to answer tricky questions about how inflation and labor shortages affect compensation. Even if employees don’t like your answers, being honest with them will build trust and make them feel more confident in your leadership.
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What to look for in your compensation management software

Even with a good understanding of what compensation management is and how it works, it’s not easy to build, manage, and maintain the processes within your organization. Given how pivotal compensation management is to a healthy, transparent work culture that attracts and retains top professionals, you need easy-to-use solutions that help you get it right from the outset. Here are some features of an effective compensation management software:
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• Easily scalable — Look for software that’ll save time for the HR team members who work in compensation management. Ideally, your choice should let you set up structured compensation and promotion review processes with‌ flexible templates and automated workflows.
  

• Interconnected products and modules — Your tool of choice should allow you to consult employee goals and performance review insights when making compensation decisions. If you can do so within the same platform, you’ll be able to make holistic compensation decisions more efficiently.
  

• Flexibility — When asked how she would choose a compensation management software, Charlette Beasley, Associate Direct of Content at TechnologyAdvice, said:
  
  “I look for those that allow you to create multiple compensation plans. That provides more flexibility for various positions and gives you the opportunity to see what proposed plans will look like before officially committing to them. You can also test them out on smaller groups.”
  

• In-depth analytics — Performance data helps managers make informed decisions ahead of their next compensation or promotion review.
  

• An intuitive dashboard — Visually breaking down granular performance and career progression data with easy-to-read dashboards helps keep your key stakeholders in the loop with all the information they need to conduct a compensation review.
  

• Integrates with skill frameworks and performance reviews — A platform that lets managers see if an employee’s current compensation aligns with their skill set and performance makes it easier to know when it’s time for a promotion.
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💰 Leapsome’s compensation management tool can equip your teams with impactful compensation management data and features you need to build and scale your compensation management processes.

Take a fair, data-driven approach to compensation with Leapsome

Compensation management takes creativity, strategy, and collaboration between stakeholders from various disciplines — not just HR.

While it can seem like a daunting task, employees appreciate structured compensation processes, and they help build a more transparent, sustainable work culture equipped for the long haul. You’ll find that the rewards of creating a good compensation management system for your company far outweigh the difficulties.‍

However, if you want help building and implementing an effective compensation process that’ll retain existing team members, delight new hires, and grow with you as your business needs evolve, Leapsome Compensation is for you. With our platform, you can spend less time doing manual compensation tasks and sifting through data and dedicate more time to what matters the most — fostering a top-tier workplace where employees feel valued and want to stay.
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🚀 Build your compensation management plan with Leapsome

Leapsome gives you access to the data and insights you need to plan and scale your compensation management efforts.
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