compensation management solutions: market primer · 2020. 12. 8. · the aligned strategy factor...

Compensation ManagementSolutions: Market Primer

Overview

Compensation is a top priority for many organizational leaders—it is afundamental factor of an organization’s employment value proposition and

the largest component of an organization’s overall labor cost.1 However, constantlyshifting labor market conditions, workforce composition, and worker preferencesmake compensation a fluid and sensitive topic. As such, many organizations aretooling their approach to compensation.

But even as compensation strategies iterate and evolve, many organizationscontinue to conduct their compensation management activities on spreadsheetsoftware or homegrown systems. To better understand how compensationsolutions can extend the functionality of legacy systems and approaches,organizations should take a closer look at the offerings available in the HRtechnology market today. This article explores how compensation managementsolutions can meet the demands of the new world of work by supporting a high-maturity approach to rewards.

In This ArticleThe current state of the compensation management solutions marketaSolution capabilities that can help drive total rewards maturity and higheraperformance

Categories of compensation management solutionsa

Copyright © 2020 Deloitte Development LLC. All rights reserved.Not for distribution. Licensed material.

MARKET LANDSCAPE

Human Capital Research & SensingDeloitte Consulting LLP

Copyright © 2020 Deloitte Development LLC. All rights reserved. Not for distribution. Licensed material.

Compensation Management Solutions: Market Primer

The State of the Compensation ManagementSolutions MarketWe define “compensation” as the design, management, and communicationof base pay, variable pay, and long-term performance or equity award plans.2

As organizations manage their compensation practices across base pay(e.g., salary and hourly wage allocation), variable pay (e.g., commissionsand bonuses), and long-term performance or equity plans (e.g.,performance units or stock options), they need a secure and efficientsystem for organizing and administering these programs.

According to Deloitte’s 2020 Global Human Capital Trends survey, manyorganizations are still trying to perfect their approach: 56 percent ofsurveyed organizations have redesigned their compensation strategy inthe last three years, and another 64 percent are currently retooling theirstrategy or plan to do so in the next three years.3 Given the inherentcomplexity of compensating today’s workforce, with its frequently shiftingpreferences and composition, it is easy to understand why manyorganizations seem to continually revisit their approach to compensation.

In fact, 69 percent of organizations say the changing nature ofcompensation expectations and strategies is “important” or “veryimportant” to their success over the next 12 to 18 months. However, only9 percent report being “very ready” to address this trend.4 Compensationstrategies are not standing the test of time, and redesign is becoming thenorm—a situation we describe as the “compensation conundrum.” Thisproblem is further exacerbated by a dizzying array of novel and high-stakeschallenges for employers in a disruptive environment, creating pressureto quickly adapt compensation strategies to immediate human capitalneeds.

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KEY POINT: Compensationstrategies are not standingthe test of time, andredesign is becoming thenorm—a situation wedescribe as the“compensationconundrum.”



Compensation in the New World of Work As the world continues to experience disruption, organizations andindividuals who have recently become more comfortable with remote workmay seek to make these arrangements permanent. This could lead to anincreased use of “geographic pay differentials”: differences in salary basedon the cost of labor in various geographies that have traditionally beenused to set pay rates by workplace location. If workers no longer need tolive near a facility, organizations may start to think about setting salariesbased on worker location instead of workplace location. Alternatively, theymay be compelled to pay a salary premium to workers required to workonsite versus those who have the flexibility to choose where they work.

In addition to geographic considerations, many organizations are feelingincreased pressure to deliver a compensation strategy that rewards theworkforce in a fair, competitive, and equitable manner. Against a backdropof social justice movements and worker empowerment, organizations arefacing increasing scrutiny of their pay practices from interested partiesboth inside and outside the organization. Whether presented withchallenges to the absolute and relative magnitude of executive pay, genderpay equity gaps, or pay variances across other worker demographics,organizations need accurate pay data and sound processes to face them.

Compensation Practices Largely In-House and withinSpreadsheetsOur HR Technology Strategy research indicates HR functions at high-performing organizations focus more frequently and to a greater extenton anchoring technology strategy to vital talent and business outcomes.5

In a time of disruption when organizations face new considerationsaffecting their outcomes and an increased focus on compensationstrategies, one might assume that matching technology capabilities to bestsupport compensation would be top of mind. But our Global HumanCapital Benchmarking data shows most organizations continue to plantheir compensation strategies using spreadsheet software (see Figure 1).6

Our conversations with total rewards professionals reveal the preferencetoward spreadsheet software is due partially to the complex needs of

Figure 1: Base Pay Compensation Planning and Program Tools Used(Percent of Companies)

* Note: The combined percentages of utilization total over 100%, indicating that some organizations deploy acombination of two or more systems.

Source: Deloitte Consulting LLP, 2020.

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organizations managing a wide variety of compensation processes,calculations, and regulations. Additionally, many compensation teams andbusiness managers are familiar with the software and feel confident usingit to handle planning and allocation processes.

The next most commonly used compensation management solutions aretraditional human resource information systems (HRIS) modules. Whetherprovided by large human capital management systems or talentmanagement suites, these modules support data integration acrossmultiple talent processes that can help enable pay-for-performancepractices and improve data availability and process efficiency. However,the same preference for the flexibility and simplicity of spreadsheetsoftware also seems to limit greater use of HRIS compensation modules.

A smaller subset of organizations believes aspects of their compensationprocesses and programs require more specialized support thanspreadsheets or HRIS modules can offer. These organizations look toeither develop custom systems internally or to engage pure-playcompensation management solutions. Pure-play vendors currentlysupport only 6 percent of organizations surveyed, leaving compensationsolutions with room for growth and increased influence.7 A matureapproach to total rewards, combined with the right solution, can helporganizations create a robust compensation program that can thrive amiddisruption in the new world of work.

Compensation Management Solutions andFactors of Rewards MaturityOur High-Impact Total Rewards research identifies six factors that driverewards maturity in high-performing organizations:8

Aligned Strategy•Holistic Philosophy•Employee Focus•Effective Communication•Greater Frequency•Team Rewards•

Our Compensation Management Solutions Market research9 identifies HRtechnology capabilities that are available to support these factors (seeFigure 2).

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KEY POINT: A matureapproach to total rewards,combined with the rightsolution, can helporganizations create arobust compensationprogram that can thriveamid disruption in the newworld of work.



Aligned StrategyThe Aligned Strategy factor describes the alignment of rewards strategywith business goals, alignment of employment brand with rewardsstrategy, and market competitiveness of the total rewards package.

A hallmark of most compensation management solutions is facilitating anorganization’s understanding of how workers are paid individually and inaggregate against selected market benchmarks. To do this, these solutionsoffer tools to access, curate, and apply various benchmark data sourcesinstead of just internal incumbent data. This may be done through anumber of demographic lenses, including individual, role, location, functionor division, and many others.

The idea of aligning rewards strategy and employment brand may beslightly more amorphous than other aspects of Aligned Strategy. Butdepending on an organization’s unique brand and strategy, certaincompensation management solution capabilities can make an impact. Forexample, organizations that brand themselves as fair and inclusiveemployers and emphasize equity and transparency as part of theirrewards strategy may leverage sophisticated solution capabilities aroundpay equity to ensure that strategy and actions match their brand.

Holistic PhilosophyIn the new world of work, “rewards” means a lot more than just a paycheckfor hours worked. The Holistic Philosophy factor describes the evolutionof the definition of rewards through the adoption of a broaderunderstanding of rewards, the development of a comprehensive rewardsphilosophy, and the implementation of a broad employee wellbeingstrategy.

Compensation management solutions can support a holistic philosophyby facilitating allocation decisions for all forms of cash-basedcompensation as well as equity or long-term incentive programs. Further,solutions that offer the capability to generate individualized compensationstatements or more comprehensive total rewards statements for workerscan help underscore the breadth of an organization’s rewards philosophyand better represent the organization’s investments in workers.

Figure 2: 6 Factors That Influence Total Rewards Maturity


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Employee FocusHigh-performing organizations break away from the perception thatemployers know what is best for their employees when it comes torewards. Instead, they treat their employees as customers and doeverything they can to understand these customers’ characteristics, needs,and preferences as well as support their “experience” with theorganization. The Employee Focus factor includes seeking input fromemployees and other sources, collaborating with talent acquisition (TA),and prioritizing employee experience.

In the context of compensation management solutions, prioritizingexperience may refer to individual employees who use the tool to accessinformation about their own compensation and rewards or to planningmanagers who use the tool to both research and record rewards allocationdecisions for employees. In either case, intuitive navigation, access torelevant and complete information, and overall ease of use all contributeto a positive user experience.

Effective CommunicationMany workers have little to no understanding of their organization’srewards offerings because the value and details of those offerings havenot been articulated in a meaningful way. A poor rewards communicationstrategy may contribute to eroding worker engagement and retention anddiminish the organization’s return on investment in rewards offerings. Buthigh-performing organizations understand the magnitude of theseinvestments and the importance of effective communication to protectand enhance them. Our research indicates the Effective Communicationfactor encompasses both the employment of a clearly definedcommunication strategy and the engagement of decision-makers topersonally deliver rewards decisions.

With respect to engaging decision-makers to personally deliver rewardsdecisions, compensation management solutions can arm planningmanagers with the information necessary to have meaningfulconversations with their employees, including a clear, auditable trail of howand by whom decisions were made. Solutions may also offer award lettercapabilities so managers can generate personalized communications.Some solutions can even restrict employee self-service access until aftera manager confirms that a compensation conversation has taken place.

Greater FrequencyThe Greater Frequency factor describes how high-performingorganizations are more likely to review and adjust base pay morefrequently than annually as well as implement variable pay plans withshorter cycles.

Compensation management solutions are often critical to enabling thesenimbler approaches, as many organizations find that manual activitiesusing spreadsheet software are simply too time-consuming and labor-intensive to be performed more than once per year. More frequentplanning cycles favor solutions that offer flexible planning periods, easily

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KEY POINT: Intuitivenavigation, access torelevant and completeinformation, and overallease of use all contribute toa positive user experience.

KEY POINT: Compensationmanagement solutions canarm planning managerswith the informationnecessary to havemeaningful conversationswith their employees.



customizable budgeting functionality, and continually refreshed internaland external compensation data.

Team RewardsHigh-performing organizations understand the importance of teams in thenew world of work and are exponentially more likely to leverage team-based awards. Further, they most commonly distribute team rewardsbased on a combination of individual contributions to team performanceand overall team performance.10

To support the delivery of team-based rewards, compensationmanagement solutions should incorporate several capabilities thatsupport the Team Rewards factor, including the ability to track and recordwhich team or teams an employee was part of and when. With teammembership established, the solutions then need to be able to apply bothbudgeting and allocations at the team level. Finally, to support rewardsbased on a combination of individual contributions to team performanceand overall team performance, solutions must to be able to track bothcriteria concurrently.

Categories of Compensation ManagementSolutionsLeaders looking beyond their legacy systems for technology support needto know which capabilities are offered by the different types of solutionproviders. Our Compensation Management Solutions Market researchexplores four main categories of solutions that support the design,management, and communication of compensation programs (see Figure3). There are other categories of solutions within this market segment thatsupport niche compensation activities, such as equity and salescompensation management, but those highly specialized solutions wereleft out of scope for this particular study.

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KEY POINT: High-performing organizationsunderstand the importanceof teams in the new worldof work and areexponentially more likely toleverage team-basedawards.



Human Capital Management SystemsOur Global Human Capital Benchmarking research tells us that outside ofspreadsheet software, traditional human capital management (HCM)system modules are the second most popular tool supportingcompensation management processes.11 In an HCM system, workforcedata is integrated and accessed across modules such as compensation,time and attendance, and payroll. Despite the integration of workforceinformation, prospective users are often confused or concerned by aperceived limitation of HCM systems to provide the customizablecapabilities to support complex compensation strategies includingvariances in plans by role, level, department, or geographic location. Whilemany HCM providers continue to make significant updates to increase thefunctionality of their compensation modules, there may still be situationsin which additional specialized solution support is desired.

Talent Management SuitesIn addition to the capabilities and support offered by integratedcompensation modules of HCM systems, many talent management suiteproviders also offer compensation management modules as part of theiroffering portfolio. In some cases, these modules can be accessed andintegrated as a stand-alone offering, but for the most part, they aredesigned for use with other relevant modules. For example, compensationmanagement and performance management modules can be integratedto support a consolidated approach to pay for performance—which canpositively impact outcomes of innovation, change management,appropriate risk-taking, and leadership development.12 To capitalize onpotential capability and pricing efficiencies when comparing against pure-play solutions, organizations should evaluate talent managementcompensation modules relative to the use of other modules from thesame provider and possible redundancy of functionality.

Figure 3: Categories of Solutions for Compensation Management


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Pure-Play Compensation SolutionsPure-play solutions are stand-alone offerings for compensation planningand / or management. They provide integration with a wide variety ofestablished HCM suite and talent management suite providers. Buildingupon interfaces with those systems, pure-play solutions can offeradditional analytical and reporting support to accompany their specializedcompensation planning and calculation applications. Many pure-playcompensation solutions were founded or developed by seasoned totalrewards practitioners who design according to common needs andchallenges of the profession. When evaluating pure-play compensationmanagement solutions, companies should look to balance theirspecialized capabilities with ease of use and compatibility with existingtechnology systems.

Compensation Analytics SolutionsCompensation analytics solutions may provide proprietary access to dataor analyses for benchmarking across a specific job, market, or industry.While all solution categories will provide some compensation analytics,specialized analytics solutions may help conduct automated calculations(e.g., pay equity analyses) that can surface and help mitigate potentialbiases in compensation practices or even propose refinements orparameters for compensation structures. Whether comparingcompensation internally against individual roles or experiences orexternally against industry or market comparisons, organizations may bewell served to understand how a compensation analytics solution mightsupport or replace existing technology. Specifically, they should look tocontrast analytics solutions against the capabilities of the other categoriesof compensation solutions to evaluate the potential need for an ecosystemapproach to address all the factors of rewards maturity.

ConclusionMany organizations are caught in a cycle of retooling their compensationstrategies without revisiting their use of compensation managementtechnology. They may continue to conduct compensation activities onspreadsheet software or homegrown systems due to both misconceptionsabout the specificity of their needs and a lack of knowledge about newmarket offerings.

As shifting workforce preferences and market demands place increasedpressure on both compensation strategies and the equity andtransparency of compensation practices, organizations should seek tobetter understand how compensation management solutions can providethe functionality they need. With compensation as the largest portion ofan organization’s labor cost and a foundational element of theemployment value proposition, organizations may no longer wish to relyon legacy technology systems to manage it. It may be time to explore thecapabilities of the compensation management solutions market to enableaccurate, efficient, and equitable workforce compensation.

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AuthorsPete DeBellis

Vice President, Total Rewards Research Leader

Matthew Shannon

Senior Research Analyst, Solution Provider Markets

Contributing ResearcherJulie Duda

Vice President, Member Advisory

Key TakeawaysAChanging compensation strategies, market dynamics, and•worker preferences present new challenges forcompensation practitioners and technologies.Many compensation strategies are not standing the test of•time, and redesign is becoming the norm—a situation wedescribe as the “compensation conundrum.”Various capabilities of compensation management solution•providers can enable a high-maturity organizational approachto total rewards.Misconceptions about specificity of needs and sophistication•of the compensation solutions market, coupled with acomfort level with spreadsheet software, may be constrainingthe uptake of pure-play solutions.It may be time for organizations to explore the capabilities of•the compensation management solutions market to enableaccurate, efficient, and equitable workforce compensation.

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EndnotesTotal Rewards Framework: Offering Design, Deloitte Consulting LLP / Pete DeBellis, 2017. 1.Compensation Management Solutions research, Deloitte Consulting LLP, 2020.2.“The compensation conundrum: Principles for a more human approach” from 2020 Global Human Capital Trends Report: The social3.enterprise at work—Paradox as a path forward, Deloitte Consulting LLP, 2020.“The compensation conundrum: Principles for a more human approach” from 2020 Global Human Capital Trends Report: The social4.enterprise at work—Paradox as a path forward, Deloitte Consulting LLP, 2020.Four Top Findings Make the Case for HR Technology Strategy, Deloitte Consulting LLP / Chris Havrilla, Erin Spencer, Charu Ratnu, and Jeff5.Mike, EdD, 2020.2020 Benchmarking Findings: Rewards, Deloitte Consulting LLP / Pete DeBellis, Beth Ann Finis, and Joi Bruce, 2020.6.2020 Benchmarking Findings: Rewards, Deloitte Consulting LLP / Pete DeBellis, Beth Ann Finis, and Joi Bruce, 2020.7.The Total Rewards Maturity Model, Deloitte Consulting LLP / Pete DeBellis, 2018.8.Compensation Management Solutions research, Deloitte Consulting LLP, 2020.9.High-Impact Total Rewards research, Deloitte Consulting LLP, 2020. 10.2020 Benchmarking Findings: Rewards, Deloitte Consulting LLP / Pete DeBellis, Beth Ann Finis, and Joi Bruce, 2020.11.Pay for Performance: New Approaches to Drive Business Outcomes and Workforce Satisfaction, Deloitte Consulting LLP / Kathi Enderes, PhD,12.Pete DeBellis, and Matthew Deruntz, 2019.

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https://humancapitalresearch.deloitte.com/article/the-total-rewards-framework-offering-design-276/

https://www2.deloitte.com/us/en/insights/focus/human-capital-trends.html






https://humancapitalresearch.deloitte.com/article/four-top-findings-make-the-case-for-hr-technology-strategy-8227/

https://humancapitalresearch.deloitte.com/article/2020-benchmarking-findings-rewards-12089/


https://humancapitalresearch.deloitte.com/article/the-total-rewards-maturity-model-2383/


https://humancapitalresearch.deloitte.com/article/pay-for-performance-new-approaches-to-drive-business-outcomes-and-workforce-satisfaction-8719/

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This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment,legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used asa basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, youshould consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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Publication Date: November 19, 2020

compensation management solutions: market primer · 2020. 12. 8. · the aligned strategy factor...

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