What is Compensation Management? And Why It’s Important [+Definition]

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What is Compensation Management? And Why It’s Important [+Definition]

As an employer, you must agree: compensation management is one of the most delicate areas of running a business.

It also happens to be one of the most important. Just ask any manager.

Inadequate compensation package is the main reason employees clear their desks and hand in their resignation letters.

Robert Half, a specialized recruitment agency with over 50 years of experience, conducted a study that proves this.

millennial turnover

The saddest thing is that your best employees are oftentimes the ones who leave you hanging first.

This is unacceptable.

The very success of your organization hinges on the effort your employees put into their work. Replacing them = unnecessary expenses. Besides, there’s no guarantee that any new employees you hire will perform as well as the last ones you had.

For that reason, managing dollars to develop incentives for your employees is key to your ‘s success.

Luckily, if you’re unsure about anything related to compensation management, you’ve come to the right place.

I’m going to break down this complex topic so that when you’re done reading, you’ll get a thorough understanding of what this type of management entails, among other things.

Let’s get right into it.

What is Compensation Management?

Compensation management is how a determines, organizes and administers the monetary and non-monetary rewards given to its employees in exchange for their time and work. What you, as an leader, includes on employees’ compensation plan is completely related to performance management.

In a nutshell, it answers the following question: What am I offering to my employees in exchange for their work and how are those incentives organized?  

That’s all it really boils down to, in its most simplistic form.

Total compensation takes into account a slew of elements. Some of the types of compensation will be obvious:

  • Salary (Base Pay/Hourly Wage)
  • Bonuses
  • Overtime Pay
  • Pension
  • Working Conditions (Are your employees allowed to work remotely?)
  • Insurance (Health, Dental)
  • Deferred Profit-Sharing Plans (DPSPs)
  • Group Registered Retirement Savings Plans (GRRSPs)
  • Inclusion of Disability Insurance
  • Vacation Days
  • Sick Days
  • Daycare

Understanding compensation management as an abstract concept isn’t challenging.

The real challenge is in its successful implementation.

You see, for small businesses with 4 or 5 employees, figuring out a strategy for employee compensation isn’t like navigating the world of astrophysics.

However, as your business grows, you will need to dive deeper into market rate, creative employee benefits and other aspects of talent management.

Naturally, the compensation strategy you used when your business had only 5 employees will not be as effective as when you’ve got 30 employees to manage.

Therefore, you need to design a compensation management system that works. Otherwise, you’ll be stunting your business’ growth.

The Components of Solid Compensation Management

Incentive compensation management has to be fair and transparent.

Believe it or not, gifting your employees attractive perks to working for your isn’t as effective as showing them the ‘why’ behind it.

You can do this by sharing with them the compensation system your organization uses.

In case you’re unaware of just what a compensation system is, it’s best defined as the elements used by management to decide how much compensation an employee receives.

This system comprises several elements, like:

  • Pay Structure – The formula that you use to come up with a salary or wage for a specific job or function within your organization. Usually, this involves the creation of ‘grades.’ These grades correspond to the minimum salary or wage given for a job. Within these broad grades, it is common for executive management to also enforce a grade range or some form of step increment. These work as markers which indicate marginal salary increases for reasons determined by the organization’s leaders, such as an employee’s growth in his or her current role.
  • Salary Statistics – This is where you gather data to see how other companies are paying their employees for similar roles. This encompasses averages on salaries, inflation stats, cost of living stats – any and everything that helps you to justify to your employees why they are receiving the amount of compensation that they get.
  • Job Evaluation – Job evaluation is all about cross-analyzing the roles and responsibilities between different jobs in an effort to narrow down on suitable compensation for each specific job.
  • Job Descriptions – These form the basis of the ‘why’ behind your employees’ compensation. Not only do job descriptions show your employees their tasks, but they also denote the level of difficulty in performing them. Job descriptions provide clarity. They also do a great job in spelling out why an employee deserves a set amount of compensation for their function within your business.

Why is Compensation Management Important?

Proper compensation management is one of the pillars that will keep your employees happy and your business thriving.

Here’s why:

  • Keeps Employees Motivated – For employees, it’s not just about the money. Stats reported by Brandon Gaill prove just that. There are other factors which play a huge part in keeping your employees wanting to come to work. Compensation MGMT lets you reinforce positive working morale in the workplace to drive your business’ growth.

what motivates employees today

  • Ensures That Managers Stay Vigilant – Managers will constantly be on the lookout for rising talents and star performers within their various departments. These employees will be recognized for their hard work and compensated accordingly.
  • Reduce Disputes – Ever heard of workers calling a sickout(a period during which multiple employees organize to take unwarranted sick leave at the same time)? Most times, when demonstrations like these happen, it’s because employees have some sort of labor dispute. Putting in place clear and transparent compensation systems lessens the likelihood of your staff staging action.
  • Boosts -Employee Retention – Effectively managing compensation for your employees shows that you value their contribution to your organization. This aids in retaining workers for longer periods.
  • Pushes Workers To Be The Best That They Can Be – Because employees know that there are benefits to working hard, they’ll put their all into their work so that they can reap the rewards that they deserve.

How to Manage Compensation the Right Way

I’ve said it before and I’ll say it again: compensation management is no walk in the park.

It is without question one of the most challenging areas of human resource management.

With all that needs to be taken into account (including how compensation impacts your business’ long-term goals), it’s no wonder that careful thought and planning needs to be done.

Having said that, appreciable compensation management is not impossible.

Here are some strategies that you can implement when tackling the topic of compensation in your organization:

  • Hiring An Compensation Manager – Sometimes, your best bet is to hire an expert in the field. Considering that compensation is such a dense area, you might be better off contracting an manager who specializes in compensation and benefits. These managers run every aspect of your ‘s compensation program. They use compensation systems to pitch fair salaries for your employees to you. They also revamp benefit plans that may already be in place and also oversee your performance appraisal system.
  • Hiring an Compensation Analyst (Optional) – In conjunction with hiring an Compensation Manager, depending on the size of your organization, it may be worth your while to hire an analyst to assist that manager. This is especially true for organizations with 100+ workers. Developing a compensation program for that many people is too much responsibility and stress for just one person to bear. Having an assistant with whom the manager can share the workload will go a long way in producing a high-quality program that brings you results.
  • Get Compensation Management Software – For small businesses which practice some form of compensation management, it’s standard to see employers using several spreadsheets to record, track, and calculate an employee’s compensation. While spreadsheets might do the job now, they can’t do it forever. As your business grows, you can’t depend on the mass of spreadsheets you’ve got. Not only is it time-consuming, but you also run the risk of misplacing data. Thankfully, advances in technology have paved the way for compensation management software to stake a claim as a must-have tool for comp managers. Do some research and choose the one which works best for your ‘s needs.
  • Scan The Market for Great Benefits For Your Employees – It’s pointless to create a compensation program that doesn’t work to your employees’ benefit. As a leader, you need to be aware of your workers’ issues as well as the trending programs that can provide them with solutions to their problems. For instance, one sure issue that millions of employees are struggling with is repaying their student loans. According to a 2018-report from Forbes, assistance to repay their student loans is the main benefit employees are looking for from their bosses.

Consequently, you need to take a step back and survey the student loan repayment programs out there so you can select the best one for your employees.

Lucky for you, you won’t have to look that hard.

The answer is staring right at you: it’s FutureFuel.

Compensation Management Tied with FutureFuel

FutureFuel is my personal recommendation for any business looking to help their employees repay student loan debt.

Founded by Laurel Taylor, this was built with one goal in mind: to make getting access to student debt centric benefits a whole lot easier.

As it stands, over $1.5 trillion is owed to student loans from 44 million borrowers. Sadly, these loans cripple students well into their adult life and hinder their ability to move forward.

By partnering with FutureFuel, you can speed up how quickly your employees can clear themselves of student debt and experience financial freedom.

‘s a quick round-up of some of the benefits your workers access by aligning with FutureFuel:

  • Lower student loan interest rates by as much as 1.7%
  • Use their Employee Churn Cost Calculator to check employee turnover costs in a fast and easy way
  • Platforms that safely and securely house your data
  • User-friendly interfacing
  • Return-on-Investment Calculator customized to your business’ specifications

FutureFuel is backed by a team that is committed to eliminating debt. One of their goals is to get rid of $30 billion in student debt by 2021.

By integrating their debt-crushing tactics with your employee compensation programs, you can make a positive change within the lives of your workers while simultaneously providing them with a compelling benefits package.

If you want to boost employee engagement, get started on your compensation management strategy today. We guarantee you that both you and your employees will be happier and more productive. There’s no better way to ensure business growth.