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5 tips for a sound compensation system

Compensation, as an integral part of human resource management, supports the organization’s basic strategy, objectives, and values.

A sound compensation system is composed of programs and practices that help make pay decisions and resolve pay problems in an effective and efficient manner, providing employees with precise information on what is considered important, efficient and well performing.

In a nutshell, the compensation system links to employee performance and career development, and when implemented appropriately, it generates a series of benefits both for the organization and the employees such as motivation and a low retention risk.

Here are five basic steps towards an efficient compensation system:

Tip no. 1 – Simplify global compensation practices
Reducing the complexity of the reward system should be a top priority for all organizations, and hence to you. Any company engaged in a wide range of rewards programs through traditional methods such as spreadsheets can testify the complexity of the process.

Modern solutions for planning, evaluation and adjustment of rewards have the advantage of reducing the complexity of the process and improve data visibility by centralizing and simplifying some of the most difficult tasks such as approvals or management by exception events.

Implementing a software solution is not always enough to be successful in terms of rewards. It primarly requires a fundamental change in the mentality of the organization’s management and HR specialists. The most important step in this direction is perhaps to examine the possibility of reducing the total number of reward plans.

A flexible and configurable solution allows defining basic reward plans (eg, a plan for each division or geographical unit) and adding unique rules or variables (employee benefits) for specific groups or business units, up to individual level. By reducing the total number of plans and by using a rewards system that allows defining or changing elements of the plan, the amount of resources and time spent in managing rewards can be significantly reduced.

Tip no.2 – Get a fresh perspective on decision making
As long as the performance evaluation system does not play a crucial role in compensation planning, HR specialists are unable to make completely accurate decisions regardin the reward system. Managers are thus likely to make biased decisions, either because of lack of time or inconsistent information.

Any company can improve decisional flows by using planning and forecasting tools (both analytical and transactional). These must enable managers to access, create, modify, update and change dashboards, metric and indicators. Moreover, the solutions implemented must be user friendly, so that non technical employees may ensure a fast acceptance and adoption of the systems.

Tip no. 3 – Align rewards and performances
Programs that link employee rewards - salary increases, bonuses, long term incentives – to performance and individual goals prove to be very effective in achieving real performances. The concept of pay-for-performance (P4P) involves developing an organizational culture that can connect directly employees rewards with their performance.

Basically, the challenge is to effectively align employee goals with organizational objectives, automate performance management and link them to complex reward policies throughout the organization. The ideal HR platform shall cover these four main areas - since it facilitates cross-functional reporting, eliminates technical problems and high costs of integrating and managing disparate systems.

Tip no. 4 – Get high visibility on global reward plans, but adapt them to the local action plan
Most companies lack an integrated overview of the reward practices The use of widespread sheets or obsolete computing systems prevent companies from getting a clear picture of the reward system at global level.

Using an integrated planning tool is a viable way for companies who want effective reward systems; however, it is common knowledge that some groups, divisions, regions or geographical areas might still need unique requirements. Adapting to the local action plan, therefore, is subject to the central reward planning system’s capacity to support unique workflows (approval) and reward cycles (birthday, anniversary, other), on divisions or geographic areas, but which can easily adapt to existing organizational hierarchies.

Tip no. 5 – Streamline the reward approval flows
Once the reward plans have been configured, the new policies (business rules) are applicable to employees. Managers should review the proposed salary adjustments, to compare them with market standards or market data and salary surveys, to adjust them as needed, and approve the final reward plans.

The process described above is relatively simple, but in reality, it can be quite difficult for organizations with complex hierarchies and reporting structures to complete. To sum up, a reward planning system should reflect the organization hierarchy, but be flexible enough to support complex organizational requirements or future changes.


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