For your company to grow successfully, getting compensation right is an absolute must. According to PayScale’s 2020 Compensation Best Practices Report (CBPR), 71 percent of organizations said they either had a current compensation strategy or were developing one.
There are many ways to approach compensation management. Hopefully your organization has a dedicated compensation manager, or you are considering hiring one, and you are investing in market survey data to inform your compensation strategy. Currently, you might be using spreadsheets to manage all your compensation data, but it’s likely you have considered purchasing dedication compensation management software. But, how can you be sure the results will be worth the cost?
In this article, we will examine the return on investment (ROI) of compensation management software. What does it do? Why does it make sense to purchase comp software and what are benefits the right compensation management program can bring to your organization? Read on to find out.
What Is Compensation Management Software?
Simply put, compensation management software helps organizations plan and administer employee compensation packages. Good compensation management software provides an administrative dashboard that allows users to manage salaries and variable pay, gather and visualize organizational data, develop a merit matrix and analyze pay equity.
Even when you’ve found a solid compensation management software solution, you need to make sure of the ROI. For investment in comp software to make the most sense, you must find evidence that the challenges stemming from your current compensation practices are costing you more per year than it would cost to implement new software and a whole new compensation strategy – and that the results would be better.
How to Know if Compensation Management Software Would Help Your Organization
In order to know if compensation management software would help your organization, consider the challenges you currently face. Here are four common compensation challenges we see.
- You currently make comp decisions based on gut-feel rather than data. Pay decisions are unstructured, often set at whatever the last person in the role was paid or by what the hiring manager feels is the “right” salary. This lack of a compensation strategy and pay-decision structure can lead to many issues related to compensation management, hiring and retention, and can put your organization at risk for pay inequity allegations.
- Compensation surveys are a resource drain and, worse, deliver conflicting data of diminishing value. Maybe you track and analyze salary surveys with multiple Excel spreadsheets. Answering each survey requires a lot of cutting and pasting from the organization’s enterprise resource planning (ERP) system to the survey response forms, wasting your valuable time for not much benefit.
- Data gaps are growing. Some positions are growing and changing so fast that annual salary surveys can’t keep up, causing you to make non-competitive offers or fail to make market adjustments for highly skilled roles. Organizations like yours do their best to adjust, but you find there are still difficulties filling or retaining key positions because compensation isn’t set properly.
- You struggle to find an accurate number for median salaries. Most organizations target the market median, but without the right tools to manage and track compensation, they actually end up paying lower than the market. This can lead to increased turnover. Pay that is too high can also be a problem.
Compensation management software can help you address and solve these challenges, which increases the return on your investment. But, that’s not all that we should factor into ROI. We must also identify how compensation management software can help your business.
How Does Compensation Management Software Help Your Business?
We’ve already touched on what good compensation management software can do. Great comp software can help with even more, including:
- Building pay ranges
- Conducting market differential analyses
- Increasing access to fresh market data
- Leveraging data from multiple sources, including the cloud, crowd-sourced data and third-party research data
- Benchmarking jobs
- Analyzing pay equity
We know that employees who feel valued stay in their organization. Recouping your investment in compensation strategy boils down to two very simple things: successfully hiring better people and successfully keeping them around. This is another area where compensation management software can benefit your organization.
What Are the Main Benefits of Compensation Management Software?
Aside from helping you solve the main challenges you face when it comes to determining and managing your compensation strategy, compensation management software offers numerous benefits that increase the ROI. Compensation management software can help you:
- Reduce the cost of turnover. With the current unemployment rate at a historical low, highly talented and skilled workers are harder than ever to keep. Turnover continues to rise as organizations compete for talent and the best and brightest leave for higher compensation, better benefits, and more professional advancement. According to Global HR consulting firm Mercer, 54 percent of employees voluntarily leaving organizations were Millennials/Generation Y (born 1978-1998), with “better job opportunity” being the most common reason for leaving.Ask yourself this: What is the number of employees who’ve left your organization in the last 12 months? Knowing that pay is the main reason employees leave, and understanding it takes at least a third of someone’s salary to replace a vacancy due to turnover (that figure increases exponentially for leadership and C-suite positions), the ability to prevent a handful of employees from leaving to find higher compensation will more than cover the cost of the software.
- Decrease the number of rejected offers. Smart hiring is one of the most important pillars of a strong organization. You work hard to recruit the best people, so when it comes time to extend an offer, that offer must be competitive, both within your industry and within your geographical location. Occasionally, you also have to think about compensating more for hot skills, especially top technology skills that command premiums in the job market. If hiring managers are extending offers only to have them rejected by strong candidates who choose to work elsewhere, it is time to review your compensation strategy and figure out where and how your offers are missing the mark.Ask yourself this: How many offers have been rejected in the last 12 months? The cost of interviewing, vetting and making an offer to clients only to have it rejected is incredibly high. Compensation management software can help lower the number of rejected offers, helping you acquire the best talent and reducing staffing costs.
- Take the guesswork out of payroll and budgeting. Most of our clients come to us with at least a few instances of severe underpayment and extreme over-payment. It’s very hard to have pay structures dialed in without current and reliable data. Additionally, managers considering new job candidates, writing a new job description, or conducting current employee reviews may have questions about compensation. These ad hoc requests add up and can consume a bulk of departmental resources for a compensation manager or HR leader.Ask yourself this: What is the estimated payroll being added to your organization over the next 12 months? How often are you discussing pay decisions? Often, the cost of compensation management software is a fraction of the cost of that payroll, and it will help ensure your pay structures are spot on.
- Eliminate gossip related to pay and improve morale. Pay is an emotional topic and a large part of your overall compensation strategy should include how you talk about pay, or your pay communications strategy.
Ask yourself this: How do your employees currently view their pay? What do they understand about how pay decisions are made? Are career and pay conversations handled consistently from team to team, or even person to person? Compensation management software can bring a new level of authority, consistency and transparency to these important conversations and reduce friction when you are having them. To learn more, check out The Definitive Guide to Effective Pay Communications.
What is the ROI of Compensation Management Software?
In 2017, PayScale commissioned Forrester to conduct a Total Economic Impact Study on the ROI of compensation management software. Forrester’s interviews with five existing PayScale customers and subsequent financial analysis found that a composite organization, based on those interviewed organizations, experienced present value (PV) benefits of about $2.3 million over three years versus PV costs of $653,000, adding up to a net present value (NPV) of more than $1.6 million and an ROI of 249 percent.
Let’s look at that number again. When we add up everything discussed in this article — reduced turnover, eliminating compensation mistakes, decreasing recruiting costs, we find a company can save more $2.3 million and expect an ROI of 249 percent, a staggering figure.
Be sure to check out the full Forrester Total Economic Impact study to learn more about how we calculated these figures.
We hope you see the benefits of compensation management software are numerous. Even aside from the considerable ROI in terms of money saved, the right software solution could help you save your own time and take the guesswork out of compensation. This could result in vast improvements in your organization’s pay brand, setting it apart as a sought-after place to work, heads above your competitors.
To learn more, request a demo to hear about our suite of compensation management software solutions.