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Compensation, although not the be-all and end-all, is a significant factor in why people choose one particular role over another. 

This is why organizations pay close attention to compensation management and it's a key responsibility of HR. Here we’ll give a quick overview of what that actually means.

What is compensation management?

Compensation management is the process of determining employees' monetary and non-monetary remuneration to support business strategy. This includes base pay, bonuses, benefits, annual raises, raise/promotion models, and incentives.

The basis of compensation management in an organization is the compensation philosophy. This is a written document that codifies how an organization will approach compensation management, for example who’s responsible for what, salaries vs the market average, and how often the compensation package is reviewed.

From here you can build a consistent pay structure that serves as a framework for job levels and salary ranges for all the positions at your company.

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Who’s responsible for compensation management?

Depending on the size of an organization, compensation management will be a joint effort between human resources (maybe a separate compensation and benefits department), finance, and the COO/CEO.

In larger organizations, there may be a dedicated team of compensation specialists dedicated to developing and maintaining the organization’s strategy for compensation.

They’re responsible for analyzing the market and reviewing internal data, such as feedback from surveys and benefits usage, to determine the effectiveness of their organization’s compensation package and how it compares with that of other organizations in a particular industry and region.

They’re also responsible for conducting job analyses to determine the skills, knowledge, and abilities required for each position, ensuring that compensation practices are compliant with all applicable laws and regulations, and advising managers on compensation-related matters, such as pay equity, salary negotiations, and job classifications.

Benefits of compensation management

  • Better hiring—you’re more likely to attract and retain the kind of talent you want
  • Greater pay equity across the organization
  • Consistent and predictable budgeting and planning
  • Helps keep a pulse on the evolution of roles and assists in overall talent management.

Compensation management best practices

1. Decide on a compensation philosophy that’s unique to your organization and tied to your values, culture, and business goals. For example, perhaps you want to offer median salaries but then generous bonuses depending on performance.

2. Review regularly. It’s recommended that salary bands are reviewed 3-4x per year, total rewards once per year, and your compensation philosophy once a year also.

3. Be transparent. When it comes to compensation, it pays to be transparent. While this might not mean disclosing everything about your compensation philosophy, being transparent about pay practices can further help with recruitment and pay equity and helps build trust internally.

Further resources

As promised, this has been a super quick run-through of what compensation management is and how to approach it.

For further detail, I recommend Mabel Lozano’s excellent article How To Create A Compensation Philosophy For Better Hiring And Retention as well as Drew Lewis’s Salary Benchmarking: Benefits And How To Do It, and our pick of the best Compensation Management Software and Compensation Courses

You can also get expert tips and advice over in the People Managing People Community, a supportive community of HR and business leaders passionate about building organizations of the future.

By Finn Bartram

Finn is an editor at People Managing People. He's passionate about growing organizations where people are empowered to continuously improve and genuinely enjoy coming to work. If not at his desk, you can find him playing sports or enjoying the great outdoors.