The leadership team of a major retailer learned some surprising things when they recently automated their organization's compensation planning and management system. They discovered that, under a decades-old compensation system, the company had incorrectly issued more than 300 quarterly bonus checks and entirely neglected to issue some 200 more. Correcting these and other newly discovered errors required generating and mailing about 1,000 additional checks. Such errors not only waste administrative time and money, but also exact hidden tolls on morale, productivity, and corporate image. Ironically, compensation is one of the biggest expenses most organizations face, if not the largest; yet, many continue to struggle with decades-old, labor-intensive systems that leave them subject to high error rates, costs, and risk.
Compensation is one of the biggest expenses most organizations face, if not the largest; yet, many continue to struggle with decades-old, labor-intensive systems that leave them subject to high error rates, costs, and risk.
All this might be tolerable in an unchanging world, but compensation plans and worker expectations concerning them are rapidly growing more sophisticated. A recent article published by WorldatWork, an association for compensation professionals, said, "Complex compensation systems have become the norm as forward-thinking companies work to align compensation more directly with business and financial goals." ("Making the Case for Automation," Workspan, July 2004)
The translation of these goals into employee performance objectives, and linking these directly to compensation, considerably complicates the administrative process. International operations, mergers, and acquisitions only add to the complexity.
Given compensation's dominance in the corporate ledger's expense column and its ever more intricate nature, companies that manage it most effectively will gain a clear competitive advantage. They will not only obtain optimal return on every compensation dollar, but also be able to attract and retain the best talent. We can readily see this by looking at how flaws in the traditional labor intensive methods of planning and administering compensation programs affect both organizations and employees.
When Compensation Goes Awry
While pay is unquestionably a prime motivator, we seldom pause to think the opposite is also true: the perception of being underpaid for value provided gradually erodes employees' motivation, lowers productivity, and ultimately increases labor cost. And because worker enthusiasm and apathy are both highly contagious, employees' perceptions about their organization's attitude and approach to compensation are often amplified. For example, consider the retailer mentioned earlier. To what extent and for how long did its errors diminish morale and productivity? How many talented job seekers learned of the problems and decided to join competitors instead? These unseen costs cannot be easily detected or measured, but can have a substantial impact on the organization.
Ultimately, when employees become dissatisfied about compensation or lose confidence in the company's ability to deliver it as expected, they begin assessing their opportunities elsewhere. Their subsequent resignations leave their former employers shorthanded and force them to undertake costly, time-consuming searches for qualified replacements who it then takes still more time to acclimate and train. Even then, companies risk hiring the wrong candidates, and facing the unwelcome choice of living with them or beginning the costly process over. Meanwhile, at competitors with higher satisfaction levels, business continues efficiently, deliveries stay on schedule, and product quality remains high. When this gap exists in the market, customers take notice.
Ultimately, when employees become dissatisfied about compensation or lose confidence in the company's ability to deliver it as expected, they begin assessing their opportunities elsewhere.
The Impact of Demographic and Legal Change
Several major changes are occurring in labor markets that seem destined to alter how employers view, design, and manage compensation plans. For example, growing interest in pay-for-performance will inevitably lead top performers to migrate toward those employers that best reward them appropriately for their contributions. Companies that do not pay for performance are increasingly left to choose from mid and low tier talent pools. And, it's not only upper levels of organizations that are affected. Our experience shows companies are driving incentive compensation plans lower into their organizations in their quest to maximize their return on compensation dollars.
The difficulty of finding and recruiting highly qualified individuals is also projected to grow markedly in the coming decade. The U.S, Bureau of Labor Statistics projects workers in the prime age group (ages 25 to 54), who comprised 71 percent of the U.S. workforce in 1992, will represent only 66 percent by 2012-a decline of more than seven percent. This significant drop, a result of the aging baby-boom segment, will enable workers in the prime of their careers to be increasingly selective about the jobs they accept. Conversely, for employers the task of finding qualified and experienced talent will be increasingly difficult.
The U.S, Bureau of Labor Statistics projects workers in the prime age group (ages 25 to 54), who comprised 71 percent of the U.S. workforce in 1992, will represent only 66 percent by 2012-a decline of more than seven percent.
On the legal front, legislators and others have been pushing to make compensation more equitable, increase transparency, and hold corporate management more accountable for their actions and practices. U.S. employers, for instance, now must contend with the requirements of the Sarbanes-Oxley Act. Complying with such ongoing regulatory change becomes more difficult as organizations and compensation plans grow in complexity.
