Compensation management is underappreciated as a means of improving performance and managing talent. Determining the right compensation for each person is critical to attracting and retaining a productive workforce. Unfortunately, it's made more challenging in many companies today because the systems and processes that support various types of compensation — pay for executives; variable pay and rewards for those in sales, field service, and contact centers; and stock and other incentive programs — are diverse and complicated. As organizations consider practices such as pay for performance and talent management, many are finding that they need a comprehensive, strategic approach to compensation.

Toward this end, they are considering what we call total compensation management to streamline their compensation processes. Total compensation management is the practice of centralizing management of the processes and systems responsible for the full compensation of every individual in an organization — including base pay (hourly and salaried); benefits; and merit or variable pay in the form of cash, stock, and other incentives.

Ventana Research sees total compensation management as a strategic process that companies can use to improve workforce performance. This view is validated by the results of benchmark research that we recently conducted on the topic of compensation. We surveyed managers in HR, finance, and operations who are responsible for, or otherwise have some management oversight of, compensation policies and practices. The research asked about best practices in compensation management, along with the realities of compensation within each respondent's organization and where the respondent's company needs to improve its processes and systems. Our methodology qualified people from 300 organizations to participate. Their responses indicate that companies are maturing in their compensation management practices.

We assessed organizations' adoption of total compensation management using a four-level maturity model that evaluates aspects of their people, processes, information, and technology. One-third of participating organizations have reached the highest (“innovative”) level of compensation management maturity. Another 31 percent of organizations are at the second-highest (“strategic”) level, so nearly two-thirds of organizations have made significant strides in managing compensation in a holistic way (see exhibit 1, below).

Still, our research revealed mixed feelings about the state of compensation practices. More than two-thirds (68 percent) of participants told us they believe that having a total compensation management system, rather than a piecemeal approach to pay, is important; however, only 40 percent are confident or very confident that their organization currently manages its compensation processes effectively. These findings indicate that many participants see a need for improvement.

The Need To Improve Compensation

Our research uncovered numerous problems with current compensation processes. The most common problems, each cited by 51 percent of respondents, are limited alignment of pay with performance and the absence of an integrated process for managing all aspects of compensation. When we asked respondents which aspects of compensation most need improvement, the two that topped the list were the fundamentals of managing base pay (cited by 43 percent) and merit pay or bonuses (26 percent). Variable compensation is becoming increasingly popular; for example, nearly one-third offer variable pay as part of their sales compensation system. But most companies focus primarily on three components of compensation: base pay, merit pay, and benefits. Only 18 percent of respondents said their organization focuses on sales compensation and 13 percent on enterprise incentives.

Nevertheless, 51 percent of participants reported that they must use two or three software systems to gain a complete view of compensation, and 30 percent have to consult four or more systems. The complexity of the situation increases with the size of the organization; 42 percent of those that have more than 10,000 employees or $1 billion in annual revenue store compensation data in four or more source systems. That's problematic, since 49 percent of survey respondents said it is very important to have a comprehensive view of compensation in order to manage talent and determine pay for performance, and more than half see a lack of integrated compensation processes as an impediment to their success. An inability to integrate compensation data ranked third (with 45 percent of respondents) among reasons companies are investing in new systems.

Our advisory experience confirms that HR effectiveness improves when all of the organization's compensation information is available in one location, simplifying assessment and improving decision-making. To reach that ideal, though, most companies need to integrate various information systems and applications; see exhibit 2 on page 6. For participants in our research, top priorities are integrating payroll (70 percent), HR (59 percent), and accounting (50 percent) systems. A complete and integrated view of compensation must include data about variable compensation (e.g., bonuses, rewards, incentives) for everyone who receives it. Our research shows that over the next year, around 10 percent of organizations will install dedicated systems to address variable compensation. Integrating them with other workforce performance and talent management software will facilitate more effective compensation.

The Widespread Use of Spreadsheets

One area of concern that our research brought to light is that for many companies, spreadsheets continue to play an important role in compensation management processes. The broad use of spreadsheets can undermine the goal of improving the efficiency and effectiveness of compensation decision-making, and it puts the integrity of compensation information at risk. Ventana Research believes that using the right systems is necessary to achieve total compensation management — but spreadsheets remain the fourth most widely used tool for compensation management. More than one-third of respondents use only spreadsheets, and 39 percent use them often, in conjunction with a dedicated system. In fact, when asked to list all of the software systems they use for compensation management, 51 percent of participants included Microsoft Excel — a far higher percentage than for the product named second most often, Oracle's PeopleSoft HRMS (21 percent).

That spreadsheets are commonly used across compensation types — in the management of merit and bonus pay (77 percent), variable pay (48 percent), base pay (47 percent), and sales compensation (42 percent) — underlines the ubiquity of this desktop tool. Perhaps more alarming, even companies thinking about integrating compensation technologies are not planning to eliminate spreadsheets from their compensation management practices. Forty-three percent said their organization needs to integrate spreadsheets with its compensation systems, which means it intends to continue using them as part of a total compensation management solution.

In other studies, Ventana Research has repeatedly found that using spreadsheets for enterprise processes both increases financial risk and has a negative impact on productivity. Our findings here echo that: Forty-three percent of participants in our compensation management benchmark research said they have found errors in payments to employees in the past 18 months when using spreadsheets for managing compensation (see exhibit 3 on page 8). More broadly, over two-thirds of organizations (68 percent) feel that inadequate systems impact their compensation planning.

In our research, respondents' dissatisfaction with their current software, combined with the widespread use of spreadsheets, reflects a pressing need for change. Our research found that 28 percent of organizations are planning to evaluate new software for compensation management.

Making Total Compensation Management Work

A variety of management capabilities are important to the success of a total compensation management program; the three most important, according to our research, are the abilities to show progress toward performance goals and targets (cited by 52 percent of research participants), to develop a pay-for-performance strategy and plans (50 percent), and to improve the reporting and analysis of compensation metrics (46 percent). Respondents also identified as important the abilities to design incentives to achieve business goals (48 percent), to accurately calculate commissions or incentives (47 percent), and to store compensation plans securely (39 percent). Clearly, effective data management is necessary for a company to achieve these capabilities. Ventana Research believes that integrating compensation information requires technology more sophisticated than spreadsheets, as well as a dedicated environment for compensation management.

The finance function should play a key role in total compensation management initiatives; one-third of survey respondents said the finance department influences and seeks to improve compensation processes, and nearly one-fourth (23 percent) said it funds investment in compensation management software. Only 19 percent of organizations do not have finance involved at all in compensation management. Ventana Research believes the role of finance is critical in the development of effective total compensation plans. HR organizations that want to raise their strategic value within the organization should work closely with finance and operations management to enable an efficient process that meets the expectations of both executives and individuals.

Our research found that, overall, organizations understand well the benefits of a total compensation management approach. Compensation is the primary motivating force for many workers. Thus, assessing and improving compensation management processes is imperative. Participants in our survey rated aligning the workforce to business strategy as the most-desired benefit of a compensation management initiative; 58 percent called it very important (see exhibit 4, at right). Forty-five percent cited improving relations with the workforce as a very important benefit. Benefits for HR and finance also garnered significant enthusiasm, particularly improving the efficiency of compensation processes (47 percent) and reducing costs and overpayments (30 percent).

The ultimate goal of any compensation management initiative is to manage compensation efficiently and to align it with the organization's strategic workforce performance goals. Companies should evaluate their own maturity and shortcomings in the area of compensation in order to plan investments of money and manpower. Executives in HR, finance, and operations who are engaged in evaluating prospective improvements to compensation management processes and systems should take the following steps, which we derived from the results of this research; from our consultation with clients; and from our knowledge of best practices involving people, processes, information, and technology.

1. Plan your program for total compensation management

   In our research, more than two-thirds (68 percent) of participants said compensation management systems are important. In addition, many organizations are adding variable pay components to compensation. This demand and a lack of confidence in existing processes are the two compelling reasons why companies should make planning for total compensation management a top priority. Enlist sponsors from finance and executive management who will support the required investments and provide organizational leadership for the program and its goals. With improved processes and systems that work together efficiently, you can reduce friction in the workforce and focus people on driving performance improvement.

2. Assess the company's maturity, and invest for improvement

   We assess organizational maturity using a four-tiered scale. In this research, the distribution of maturity levels among participating companies was fairly even but skewed somewhat toward the higher end (see exhibit 1). Those at the most advanced level, the “innovative” level, have completed sophisticated compensation management deployments. Those at the intermediate levels — “strategic” and “advanced” — are looking to satisfy their requirements and address existing impediments but have not done so fully; they are still using spreadsheets for some compensation activities. Those at the tactical level have no plans to deploy compensation systems even to specific areas that could benefit, such as sales or contact centers. Use these same benchmarks to determine your organization's maturity level, and consider where it could benefit from total compensation management.

3. Define your requirements before considering new technology

   Make sure you fully understand what your managers want and need from compensation management activities so that you can determine the type of application to use and the sources of data to draw upon. Every individual compensation management software system has strengths and weaknesses. Some are better at managing variable pay components, while others have better capabilities for making strategic decisions about workforce planning. By clearly defining your business, user, information, and technology requirements, you will be better equipped to evaluate how well providers of total compensation management technologies can satisfy your particular needs. Bear in mind that it is possible that no single dedicated application will meet all of your needs; you may need to bring together specific capabilities from different systems.

4. Replace outmoded technology, and integrate the relevant systems

   Our benchmark research identified a disturbing disconnect between participants' articulated need for better processes and the absence of total compensation management systems in their organizations. Spreadsheets and dispersed information are such widespread problems that even small improvements should yield benefits.

   Some organizations are trying to rationalize their overall compensation management practices and reduce their use of spreadsheets, but many are still purchasing stand-alone compensation systems to support the specific requirements of sales, executives, field service, and contact centers. Driving improvement necessitates the integration of existing information sources with compensation and workforce performance or talent management systems. This integration requires that the organization focus not just on the usability and functionality of the applications but also on the architecture needed to support integration with other internal systems, including the HRMS system and spreadsheets, as well as externally hosted or on-demand systems. Explore ways to streamline the data-integration process, then find a system of record for compensation that can become the central repository of compensation information at every level, from individual to organization. If your company needs to maintain separate compensation systems, they should be designed to support the total compensation management system that provides the integrated view.

5. Focus on outcomes for improving workforce performance

   Before an organization can take action to realize the benefits of investment in total compensation management, the HR and finance functions must agree on the proper direction for the compensation management initiative. The benefit companies most desire is to align their workforce to business strategy and goals (58 percent), which is assisted by efficiency of process (47 percent), improved relationships with the workforce (45 percent), and establishing pay for documented performance (43 percent). See exhibit 4, above. The opportunity to make improvements is large, and focusing on specific benefits will help finance and HR maximize the workforce investment.

   Total compensation management is poised to become a powerful component of workforce performance management; used properly, it can provide information and technology that will help the organization understand how to get full value from the talent of its workforce. At its best, it can provide a competitive advantage. Ventana Research advises businesses looking to innovate to add total compensation management to their list of strategic investment priorities.

Exhibit 2

Integration of Compensation Systems

Which systems does your organization need to integrate with its compensation systems?

Payroll	70%
HRMS	59%
Accounting	50%
Spreadsheets	43%
Salary benchmarking	40%
Financial planning	40%
Sales compensation	36%
Talent management	33%
Employee portal	32%
Stock option	22%
Learning management	21%
ERP	17%
Business intelligence	13%
No integration needed	9%

Mark Smith is the CEO and executive vice president of research for Ventana Research, a benchmark research and strategic advisory services firm providing guidance to help organizations optimize performance.