Harnessing HR tech to optimize compensation strategy

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The effectiveness of an employee compensation strategy can make or break a company. Overpaying can preclude adequate funding of other vital investments. Underpaying your most valuable employees is equally costly. So, how can HR technology support human decision-making on pay? For insights, Employee Benefit News recently spoke to Neil Shastri, leader of the Global Insights and Innovations team at Aon Hewitt’s rewards and talent consulting unit. Edited excerpts of that conversation follow.

Employee Benefit News: Employee compensation is typically a company’s largest expense category. How are HR systems helping companies to make that investment as efficiently as possible, particularly as employees’ compensation priorities evolve?

Neil Shastri: One thing that hasn’t changed much is annual merit increases. The standard number for many years has been 3%, and we don’t expect that average to change much. But that doesn’t mean HR systems aren’t valuable in this area. For example, alongside that 3% raise pattern is a trend that the proportion of the payroll allocated to variable pay has been increasing. This complicates things.

EBN: What about changes in the forms of compensation that employees are shifting their focus to?

Shastri: For many years, employees valued training opportunities and ways to advance their career. But more recently basic pay has been becoming a larger factor of engagement, relatively speaking. This has led employers to focus on “total rewards optimization.”

EBN: How can HR systems help employers with that?

Shastri: The questions being asked are, for example: would you trade off a paid vacation for an extra bonus? Would you trade off recognition for, you know, whatever? Some employers approach this task scientifically, looking for personas, as we call them. It could be the baby boomer approaching retirement, looking to pay off a mortgage. You use these personas to segment the employee population, and project their compensation needs and expectations to get a snapshot view the entire organization.

EBN: What kind of tools have made it easier for employers to put this information together in a way they can use?

Shastri: A lot of consulting firms, including us, help employers get an overall feel for what their employees want. But also the HR systems like Workday and HR components of Oracle and SAP have tools that allow you to do salary and bonus projections a lot better. But those tools are only as good as the data that you provide them and as good as the advice that you follow from the tool. If the tool tells you that the bell curve needs to look a particular way, but your managers decide that they’re going to skew the bell curve, the tools are not going to really help you.

EBN: So how do you avoid that?

Shastri: Part of the answer is that you can set limits on the increases you can give, without getting approval to override them. That’s where the human element comes in. Also, today’s analytics do better job of showing you the variance between the compensation budget, and what actually happened on the ground. And when you have those variances, the systems can project scenarios out for the rest of the year. The systems help you do that, but they can’t make the decisions for you.

EBN: So you can easily see the variances, then what? Can the system help you understand what’s behind the variances to help you reforecast?

Shastri: The system can point out red flags that need to be addressed. But you would probably still need an analytics team within HR to pinpoint the reasons for those variances.

EBN: To what degree can systems help you determine the proper level of compensation for employees representing different demographic segments within the company?

Shastri: That generally requires inputting survey data from external providers with large databases, like salary.com and Glassdoor. You can get a direct feed into your system. But you still need to take any such publicly available data with a grain of salt. We see a lot of variance between what our numbers tell us firms are offering, and what numbers are on Glassdoor or salary.com tell us.

EBN: What about mining big data? Can’t that kind of analytics give employers some insights for employee compensation strategies, beyond basic pay levels?

Shastri: I haven’t seen that yet with the commercially available systems, but we take that approach when helping clients with benefits communications. This is important because benefits communication is very important but, all too often, employees don’t read it.

EBN: I guess effective benefits communication ties back to compensation strategy, to the extent that employees who understand and value their benefits are more likely to be content with a 2 or 3% annual raise.

Shastri: Absolutely. Also, we are seeing progressive clients emphasize this concept of total wellness, which is both your health and wealth. So many new young employees come in saddled with student debt. With the financial education that’s part of the total wellness approach, those employees ultimately can be in a better place, which really amounts to a form of compensation.

EBN: Earlier you spoke about using systems to make sure the high-performers are being appropriately compensated. But what about also focusing on the nature of the jobs, and differentiating based on how important they are to the company’s success?

Shastri: Right. Oftentimes organizations don’t really identify which the most critical roles are. If you have people in those jobs who are disengaged and dissatisfied with their compensation, resulting in turnover, that can be very harmful.

EBN: I assume the system itself doesn’t identify which positions are critical?

Shastri: No, it won’t do that for you. But once you have identified those critical roles, what the system can do for you is give you the historic data and help you track over a period of time whether people in those critical positions are being underpaid compared to both external norms as well as internal norms.

EBN: Does this principle extend to which parts of the company or divisions are more crucial than others?

Shastri: Indeed, one of the big issues today in many companies is using different compensation approaches between the part that will be the source of future growth, and the more stable core businesses. You need to manage the tension between the folks who are generating the cash, and those who are going to need that cash to invest to keep the company growing.

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