CompLogix Insights

What is Compensation Planning Software?

May 7, 2020

In this week’s blog post we are going back to the basics… to the very basics.

This is for all you newbies or those who just need a review of compensation, compensation management, and compensation software programs. We are going to dive into all the nitty-gritty details of what compensation is, how it works, and how software systems factor into that equation (spoiler alert: they make everything way easier).

To begin, we will start with the basics of compensation. This document called “Human Resource Management: Employee Compensation Guide” breaks it down pretty simply, but I’ll do you a favor and discuss it briefly here.

Essentially, there are two major types of compensation: direct and indirect compensation and the definitions are pretty self-explanatory. Direct compensation refers to any type of pay that goes directly to the employee. This includes both base pay and merit pay, which together encompass things such as salary and wages, bonuses, stock options, savings plans, commissions, or profit-sharing. Indirect compensation is anything that has monetary value but is not delivered in direct cash. This type of compensation is far more diverse than direct compensation because the options are really customizable to each individual company. Some examples of indirect compensation include insurance programs, pensions, vacation and holidays, sick leave, and access to company perks, such as gym memberships, vehicles, and other kinds of special services.

Now that we know all the various parts that can make up the broad category of compensation, let’s look into the details of a compensation plan. As you may have guessed, a compensation management plan is any of the specific pieces of compensation arranged in a way that makes sense for your company.

Now for the difficult part… how on do you take all of these pieces and create a plan that actually works for your company? One that promotes growth and development, keeps employees around and keeps everyone in the company engaged and excited about the work they are doing.

Well, there are a few basic steps that you need to take to ensure that your compensation plan will be successful.

Christy Hopkins article lays it out plain and simply: 6 easy steps to a compensation management plan. First, “Establish a Pay Philosophy,” which means prioritize the types of compensation that you want to offer and what benefits you will give your employees. Next, “How Much is Your Compensation Paying.” Figure out how you are going to compare and compete with similar companies or job positions. Third, “Set the Salary Level or Hourly Pay Rate.” Now you have to decide between the two modes of pay, for each position of course, and then pick a number that seems suitable. Fourth, “Creative Incentive Compensation Components.” At this point, you are layering on the benefits. Do you want to offer extra vacation days or sick days, will you provide quarterly bonuses or merit-based, yearly bonuses. Fifth, “Pay Raises,” so you now need to decide when employees get raises, how those raises are based, and how much they will actually be. And finally, the sixth step is to “Chose Your Payroll Software.” This is what will manage how your employees actually get paid and sets up tax information and workers compensation programs.

If it wasn’t blatantly obvious, none of this is actually easy to do on your own.  In fact, it’s incredibly difficult! Within these six easy steps, are a million other things that you have to consider, and this doesn’t even include the yearly compensation planning session, where you have to double and triple check all of your spreadsheets and then reevaluate if the plan still works for your company. Even if you know all the different types of compensation, various combinations they could be made into, there are still many, many moving parts of the equation that you have to figure out in order to have the best possible compensation management plan for your company.

That’s where a compensation software and the title of this article comes into play.

Compensation planning software is just about as simple as its name. It is a software program that you purchase from a compensation software company that will create a custom piece of software that fits both the needs and existing infrastructure of your company. “But,” you might say, “how can an algorithm know exactly what I need for my company? It can’t read my mind!”

To that I would respond…. You’re right. It can’t read your mind! But, with an investment in compensation planning software you are not gaining just the software itself. You will be consulting with a compensation specialist of the compensation software company to discuss your specific needs and priorities. Then, they will customize your program to do exactly what you need it to do. It can even be programmed to fit your existing HR software, so there is even less work on your part. 

See, it all fits right into the six-step plan… except you get to skip steps 2-5. When using a compensation software, you need to have an idea of what you want your company’s compensation system to look like, or your “compensation philosophy,” but you do not have to have every single detail mapped out. The software does it all for you!

So let’s get back to my original question: “What is compensation planning software?” In reality, it’s the answer to your compensation problems. It is a program that is designed specifically to support your company’s compensation needs and budget, keep your employees engaged and happy, and, overall, lead your company on a path to growth and even more success.

Here at Harvest HCM we will work hard to provide the services you need through our compensation software and performance management programs that are always customized for you.  

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