Having just completed the 2023 Ventana Research Value Index for Total Compensation Management, I want to share some of my observations about how the market has advanced since our assessment three years ago. For more than two decades, Ventana Research has conducted market research in a spectrum of related areas including Total Compensation Management (TCM) as well as broader HCM areas ranging from employee experience, learning management, workforce management (WFM) to payroll management and learning. We have also done research on the employee experience and candidate engagement. Our continuous research and analysis of the market for business applications and technologies guide our comprehensive approach to this Value Index.
Compensation management is a key talent management process involving all workers and managers within an organization. Determining and providing the appropriate compensation for each person — whether it involves base pay, merit pay or variable pay and incentives such as bonuses — is critical to attracting and retaining productive members of the workforce, including full- and part-time employees, contingent workers and contractors. The complexities of compensation often prove to be a core challenge for human resources departments as they strive to keep the organization productive, satisfied and motivated while ensuring equitable and defensible pay practices across the entire workforce.
The ability to offer a personalized employee experience, particularly when it comes to compensation and rewards, is a competitive differentiator and should be a key part of an organization’s efforts to attract and retain top talent. A tight labor market and shifts in worker expectations have put pressure on organizations to accommodate worker preferences in total compensation, where monetary and non-monetary reward schemes must be flexible enough to be personalized while still maintaining equity. Artificial intelligence and machine learning technologies increasingly make it possible to personalize compensation and rewards in a way that scales. New digital tools and capabilities in compensation are able to not only personalize rewards but can help organizations model compensation pool funding or compensation based on organizational structure. These systems can support complex plans and packages and automatically trigger a new compensation plan or configure individual packages when a worker’s status changes. They even can match jobs to compensation market data when no direct matches exist, analyzing the cost of adjusting compensation for certain job families or business segments. This is particularly relevant with the rise of skills-based hiring and promotion, where organizations must compare roles and related pay based not just on job family or title, but on the skills and competencies needed to perform in a job regardless of the functional title or organizational placement.
(TCM vendors have responded to requests that they improve existing functionality. Examples include the flexibility to consider an array of factors and better visual displays of budgets, including pool allocations to workforce segments such as high-potential workers or those with desirable skills. Systems are also offering more configurable and personalized total compensation statements and much better support for communicating with employees about total compensation. These platforms also integrate to varying degrees with performance management tools and financial systems as well as payroll, competency models, third-party administrators of equity plans and other systems.
The corporate compensation function once was satisfied with distributing a compensation statement just once a year to note base salary and any bonuses. These statements have now evolved to highlight everything the organization spends on the worker, including benefits (not just insurance coverages), the value of accrued PTO, potential variable compensation and incentive payout scenarios as well as various nonfinancial rewards. Further, the annual compensation and rewards review cycle has given way to the more progressive trend of continuous compensation management. Historically, organizations have approached compensation planning cyclically, assessing the marketplace at regular intervals to ensure employee remuneration remains competitive and equitable. On the surface, this approach provides a structured way for organizations to gauge market trends, adjust compensation frameworks and budget accordingly. But in an increasingly competitive business landscape, companies recognize the vital role of continuous compensation planning in ensuring success by mitigating the risk of attrition and overzealous outlays on recruitment and retention efforts. Organizations maximizing technology to continuously monitor and adjust compensation plans will be best positioned to remain agile and responsive in an ever-evolving market.
Despite the improvements in available systems and tools, we continue to see an overreliance on spreadsheets to manage and report on data during a compensation cycle. Line managers, HR and compensation professionals along with senior leaders often think spreadsheets are more convenient, flexible and discrete. Unfortunately, this misperception can cause serious problems. Among those organizations using spreadsheets, nearly one-third (29%) said they occasionally find errors that result in incorrect payment to employees while an additional one-half find errors that they are able to correct before payment. Still, the majority of organizations we surveyed continue to rely on spreadsheets in their compensation management process, with more than one-quarter (26%) using them exclusively. Today’s best rewards platforms present data in a spreadsheet-like display, requiring minimal training and offering far better security and version control. Vendors now offer rich visualization capabilities, easy integration with employee data, market pricing data and far more modeling and what-if analyses than spreadsheets can provide. These systems also minimize the risks of data errors that can lead to financial liability or employee flight or disengagement.
No evaluation of compensation management technology would be complete without a review of its ability to support organizational efforts to ensure pay equity in the workforce. Workers’ expectation to be compensated equitably regardless of race, gender, ethnicity, age and other demographic characteristics is more prevalent than ever. This expectation is bolstered by potential investors’ increased focus on organizations environmental, social and governance (ESG) standards and behaviors as social consciousness has become a more important consideration in investment decisions. Evolving regulatory and legal requirements have also put a spotlight on the issue of pay equity, and yet our research reveals that fewer than one-half (43%) of organizations actively manage compensation equality today. Compensation management software can help organizations make informed and equitable compensation decisions.
You can find more details on our site as well as in the Value Index Market Report.