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compensation management

The Ultimate Guide to Building Compensation Models That Work

Designing an effective compensation model is no easy feat. It’s one of the most complex series of decisions any company, especially the ones that are starting out, will face. 

It involves carefully selecting right components–like base pay, variable pay, incentives, and pay levels–that create a win-win situation for both employees and the organization. The employees need to be remunerated fairly and appropriately for their contribution without affecting the company’s bottom-line greatly. 

A good compensation model starts with the organizational objectives. Answering questions like:

  • How do I attract the best talent?
  • How can I scale operations?
  • What kind of talent do we need?

will help you zero in on a compensation model that can be fruitful.

The different elements of compensation

Good compensation management is important for any business as it keeps employees happy and the business thriving. Adjusting the different components to varying levels to create an effective model is paramount to success. The different types of compensation include:

  • Salary 
  • Overtime pay
  • Commission
  • Bonuses
  • Long-term incentives, equity awards
  • Several allowances
  • Health and life insurance
  • Vacation time
  • Retirement savings

Benefits are pretty much going to be determined by government laws and compliance regulations but you can modify your perks to create an attractive compensation package. Some place emphasis on the base pay while others focus more on the performance-based components. 

How to create a solid compensation model

Before you build a compensation model, you need a thorough understanding of your business and its objectives. Think about the expanse of your business, how many people you’d need to run operations, and which ones are essential to your future goals. 

Gather the background information

The first step to a successful compensation model is to understand why it is being built in the first place, what needs to be executed, and what the desired end result is. You need buy-in from the management and other key decision-makers. That way, your compensation model is aligned with business objectives and company culture.

Building a pay structure from scratch means you need to develop a compensation philosophy, do the market research, clarify concepts that define your organization’s fundamental beliefs, and then develop it. 

You need the following basic information to get started:

  • Jobs roles and designations
  • Pros and cons of current models
  • Internal and external surveys
  • Geographical locations
  • Industry standards

Write job descriptions

Once you have the titles for each role, come up with unique job descriptions for each of those positions. Research your competitors but more importantly, make it unique to your company. Think along the lines of what responsibilities you want each of those individuals to hold and make sure they are reflected in the job descriptions.

You also need to develop job grades to enable flexibility and fair compensation. You’ll have a reference framework which ensures equivalent jobs have pay equity. 

Determine an appropriate amount

You’d have already researched your competitors by now. Make sure you note down how much they are paying on average for a specific role and what the industry average is.This should give you a rough idea about what you need to spend to attract the best talent in town.

Identify benefits and incentives

When doing your compensation research, keep tabs on what benefits they offer and what incentives are common in your market. Benefits like dental insurance, vacation days, child care facilities, and gym memberships are increasingly common. Understand what you’ll be able to offer and what’s the best form that can be lucrative. It’s important to remember the best benefits are not always the most expensive ones. Understand what your potential employees care about and offer them that.

When it comes to incentives, you need to know what motivates them to go above and beyond. We wrote an entire article about designing sales compensation plans and incentives. Check it out here.

Benchmark positions against market data

Salary benchmarking is a technique to identify the market rate for each role by matching internal job descriptions to external jobs with similar responsibilities. 

You need to perform market assessments and salary comparisons before you create a new position complete with job responsibilities and a corresponding salary. Things like location, company size, and education level factor into the final salary, and all must be considered before filling the position.

Using all these data points, you should now be able to arrive at a pay range for each of your job roles. These ranges allow hiring managers to be flexible in factoring experience and additional qualifications.

Evaluate and implement the model

Review your model and build rules to make sure your pay structure stays current and up to date.

  • How often will you update the model?
  • When will the new model be effective from?
  • What are the procedures for updating the model?
  • Who has access to the model and who can make changes?

Now your compensation model is ready to be deployed after getting approval from key stakeholders. Send out organization-wide communication so everyone understands the pay structure clearly.

What makes a good compensation model?

Though there’s no one-size-fits-all model, you need to ensure that your pay structure passes the following checks:

  • Is the compensation equitable across gender, race, religion, age, and more?
  • Do employees perceive the model as fair? 
  • Is it financially sensitive to the organization’s strategy? 
  • Does it adhere to your organizational philosophy? 
  • Are the policies legally compliant?
  • Is it current and in line with what is offered in the broader market?

Closing thoughts

To be successful in attracting and retaining talent in today’s competitive marketplace, you need to develop a model that suits your objectives and unique requirements. A well-designed compensation model bolsters the organization’s strategic plan, business goals, and competitiveness.

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Uncategorized

Do SMBs need compensation software?

HR and compensation management are two critical aspects of any early-stage company. They are indispensable disciplines in enterprises and large scale companies because managing and processing compensation and benefits can take a large portion of a professional’s time. This is more evident in large companies but their importance gets diluted in small and medium businesses, and sometimes rightly so. 

Most small and medium businesses are limited by budget and so the extent to which these companies can go to attract new talent in a competitive landscape while being fiscally responsible to themselves is small. They prefer using manual-labor-intensive tools like spreadsheets which cause a huge dent in their productivity and accuracy. This can be quite an alarming signal when it comes to audits and compliance where the records are marred with errors. Still, SMBs often disregard the benefits a compensation management tool brings to the table. 

5 compelling reasons why every SMB needs compensation software

No matter the size of the company, C&B professionals face issues in determining the right pay and relevant perks that incentivize and motivate employees while rewarding them for their contributions to the company. They struggle to create a win-win situation for both the employees and the organization. 

A near-perfect scenario is when employees are motivated to perform their best work and are rewarded fairly without causing a dent to the company’s bottom line. This is the gap compensation management software tools like Compport intend to fill.

Greater accuracy

When you use Manual methods like spreadsheets and other programs to manage compensation, the chance of error is high. A missing zero can have a tremendous impact on your reputation as well as when it comes to audits. In the case of a compensation tool, all the data is stored in one place. A record change in one place, say the employee details, automatically alters all other relevant records and significantly reduces the risk for human error. 

Better control

Another reason why most small businesses struggle with spreadsheets is that there’s little to no control. Anyone can access the sheets and make changes. Though spreadsheets allow user-based permissions they lack the granularity a compensation tool offers. If you are using a tool like Compport fit, administrators can implement user-based restrictions and budget controls as fail-safes. You can create roles for employees based on the requirement and can generally have more control over the processes.

Ease of use

Compensation is a pivotal function to any company and when manually done it can suck up a lot of your time; precious hours that can be focused elsewhere that can benefit your organization in other ways. Using a compensation management tool is as simple as the push of a button. Once the initial set up is done, the rest of the process is mostly automated, thereby freeing up your time. 

Improved data security

Data security is something companies should care about right from the start, no matter the size, particularly when they are dealing with sensitive payroll information of its workforce. Most modern compensation tools come with enterprise-grade security and privacy standards built-in. This ensures that your data cannot be accessed by unauthorized people and its integrity is protected.

Scalability

Most SMBs make do with spreadsheets and they work to an extent. The real problem comes when the companies grow in size and the number of employees increases. It simply doesn’t mean the addition of a few more rows, in worst cases, it can mean dismantling the entire system and reassembling it to accommodate the growing needs. Using a compensation management tool future-proofs your business to growing compensation requirements.

Take the leap to automated compensation management

While medium and large enterprises have more complex processes, smaller enterprises require simpler processes in which there are little to no complications. Most compensation tools in the market are geared toward the former segment, completely neglecting the needs of SMBS.

With Compport FIT, what we have now is a fully digitized, self-serve model that is extremely independent and does not require a steep learning curve to get started. You can also now fill the expertrise gap. This means that the tool will help consolidate and automate some of the core HR processes in terms of compensation management, shrinking your dependency on an expert who more or less is a costlier alternative.

SMBs can now digitize core HR processes with the world’s first compensation management software that can be purchased and implemented, directly. Compport FIT is easy to use and designed with the needs of small and medium businesses in mind. It’s user-friendly, agile, flexible, and cost-effective. Start your free trial today.

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compensation management

3 Ways to Keep Employee Engagement High with Unique Benefits in the “New Normal”

The employee engagement levels have hit an all-time low in the new normal. As employees and employers adapt to the work from home environment, the dropping engagement levels may not be the best news for any business.

With an unprecedented hike in remote jobs, employees have so many options. So, failing to keep them engaged will lead to employees moving on to the next glittery opportunity in the horizon resulting in high churn and its own Pandora’s box of problems.

How can organizations keep employee engagement high during this age of remote work (and beyond?) While people may believe that compensation can not make much of a difference, listed below are three unique ways that the right set of benefits can make a real impact on your employee engagement levels. 

1. Deliver on your promises

With so much chaos happening around us, it’s no wonder that some organizations have trouble paying their employees on time. Although employees understand and empathize with the hurdles their employers face, employees will neither wait around forever nor will they stay staunchly loyal if they receive a tempting offer. 

That doesn’t mean you have to up your ante and overpay your employees to retain them. When everything around us diverts into chaos and madness, just deliver on your promises. If you intend to cut a percentage of your employee’s salaries to keep the cash flow strong, make sure that it doesn’t affect those employees who are living from one paycheck to another. 

A recent Towers Watson research shows that employees who believe they are paid fairly will be 4.5x times highly engaged as compared to those employees who aren’t paid fairly.

2. Move towards pay transparency

Payroll and compensation have always been shrouded in secrecy. What’s worse, a few leaders believe that compensation and benefits of employees must be treated sacred and it should remain confidential until eternity. But what they don’t realize is secrecy only breeds mistrust.  

On the other hand, organizations like Buffer who have an open pay system show that it not only ensures high trust among employees but also enables them to treat their employees fairly without any bias or favoritism. 

Being transparent about employee pay can pave the way to reduced pay gaps, improved employee engagement, and enhanced organizational trust. What’s more, it can help functional managers and department heads take data-driven compensation decisions. This will also put a stop to all concerns of employees about substandard or unfair compensation. 

3. Reassure your employees

These uncertain times have left employees in a state of panic filled concern. They are worried about everything from their job security to business continuity. Transitions are always hard, particularly if the way they work is changing. What is the best way to help employees and ease their concerns during these uncertain times?

Here’s what we at Compport did to reassure our employees and assuage their fears. As we moved swiftly to remote work, we put in all our efforts to get our virtual remote network up and running. Once that was ready, we offered all our employees with high speed unlimited broadband connection and even went so far as to pay extra to establish a new connection.

We did not cut any corners when we helped our employees set up a home office. We ensured that they had ergonomic chairs and sturdy tables to work from. To out win power outages, we provided our employees with inverters that ensure backup support. In addition to that, we went ahead and extended timelines of project deliveries to reduce their stress levels and help them get used to the new normal. 

While daily sync calls helped keep each other up-to-date, we kept a close watch on the health, motivation, and sentiments of our employees. Our leaders reassured all employees frequently to assuage their fears associated with job security. All our employee reassurance activities from sending safety equipment for family members to extending mediclaim and life insurance policy covers were welcomed by all our employees unanimously.

Conclusion 

Unique benefits and compensation not only play a huge role in attracting the right employees, they also have an equally strong say in retaining those employees. By providing your employees with the best benefits you can offer, you can encourage them to go the extra mile and invest their heart and soul to meet your business goals. 

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compensation management

5 Tips to Handle Global Compensation

As an organization expands internationally, its market share grows, revenue increases, and workforce diversifies. Underneath all these positive happenings, the complexity of compensation management also increases. 

When companies start out business units in a different country, it’s a common practice to send an employee to the local region (host country). Employees on international assignments present a challenge to HR and payroll functions in organizations. Compensation professionals need to delicately balance rewarding expatriates, motivating them, and incentivizing them to move to a new country (which can be for several reasons including personal travel interests) while controlling the costs for the corporate headquarters.

Even if your compensation and incentive designs are straightforward, being a multinational organization means you need to whizz through the intricate bureaucracy and needs of dissimilar countries in terms of culture, living costs, currencies, languages, time zones, and more. Another challenge lies in balancing global views and local execution. It’s extremely difficult to maintain consistency in bonus plans and reward schemes among all your centers because local contracts require flexibility. Also, controlling the workflow process and meeting timelines can be a challenge in itself because of the language and time-zone barriers.  

Having a long-term vision and a strategy in place to handle the multifaceted nature of global compensation is essential for any business that’s in the process of internationalization. If your company has left or planning to leave a global footprint, then these five tips are for you:

1. Don’t replicate your headquarter’s policies, localize them effectively

It’s quite often the case that companies replicate their headquartered company policies as they expand. According to a survey conducted by Watson Wyatt Worldwide of 275 organizations located in more than two countries, one in two companies takes a standardized approach to handling global compensation. These one-size-fits-all policies create concerns with internal pay equity, adverse performance achievement, employee retention, and most importantly, profitability. You need to design customized compensation structures that specifically cater to the varied needs of each region.

2. Ensure compliance in the home and host countries

According to a report from EY, compliance ranks as the number one challenge organizations face in global compensation. This is because of the increased intervention from local tax and revenue authorities. You’ll need to pay attention to the regulatory compensation laws of the host country when you consider hiring a local team. This includes immigration and employment laws, minimum wage laws, income and social security withholdings, insurance, and intercompany charging/transfer pricing.  A significant effort is often required to maintain compliance in all countries, and substantial penalties and fines may be imposed if a company is not compliant with both home and host payroll regulations. 

3. Ensure the same (or better) standard of living

One of the main goals of global compensation is to maintain the expatriates’ standard of living in the home country. Maintaining an equitable structure can be extremely challenging but you can use the balance sheet approach to tackle that challenge. Build a balance sheet that lists the costs of major expenses in both the home and host countries. Pay attention to differences and use that to increase or decrease the compensation to keep it balanced.

4. Create benchmarks for local salaries

Benchmarking compensation for local subsidiaries is a real challenge because the pay structure is designed based on the local practices (tipping, for example) and laws. Some companies create bands to maintain internal pay equity, irrespective of the geographic location. However, this may not be the best course of action as it can have the opposite effect, creating inequality in countries with high costs of living. Your goal should be to create pay equity within each geographic location rather than the company as a whole.Create local benchmarks for base salary, bonuses, commissions, and other rewards.

5. Continuously improve with reporting and analytics

Leveraging the data and feedback you receive, both quantitative and qualitative, can greatly contribute to the success of your global compensation programs. You need to establish a robust data collection and validation system that gives you the confidence that costs and compliance can be managed across geographies. Periodically review reports about the global compensation and individual country-wise costs and drill down into pay bands, grades, or even pay components. This will help you identify areas of potential costs savings either in your existing business units or when your organization explores a new market.

How can Compport help?

Compport is a complete compensation management suite for global organizations to manage salary increases, bonuses, sales incentives, long-term incentives, and any rewards. Compport’s easy-to-use platform supports multiple currencies and pay periods which is crucial when handling global compensation. It easily enables you to design and execute diverse compensation plans for any geography, business, employee group while giving you the opportunity to efficiently govern the overall process and manage budget (with break-ups) centrally. You can create multiple scenarios to decide on the optimal budget allocation across different regions, divisions, and business units. It gives you complete control to manage the compensation process with both flexibility and consistency, With Compport, you can keep the core rewards philosophy the same and consistent while making necessary adjustments to serve the diverse/ local needs. Join us for a free demo and see what we can bring to the table.

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compensation management

Has Compensation Management Joined the Analytic Revolution?

Compensation analytics is a fairly new discipline with its foundations in HR analytics, focusing on the effectiveness and optimization of the employment costs. It uses people analytics and helps organizations make data-driven decisions regarding fair compensation.

A study by CEB Global, found that leaders in HR analytics improved talent outcomes by 12 percent, which resulted in a direct increase in 4 percent rise in gross profit margin. If you know where to focus and use the right HR tech to make analytics more accessible, you can turn compensation into a strategic function and data-informed. Doing so, it enables HR leaders to identify top performers and reward them adequately, thereby increasing morale, reducing attrition, and improving the bottom-line. 

How analytics has changed the compensation landscape

Compensation is the largest item in your annual budget; it’s also the largest source of data, containing precise and varied information, that can be used to develop strategic and tactical plans as well as guide business objectives.

Whether you’re hiring a new employee, addressing the pay concerns of existing ones, ensuring fair pay, or developing a competitive compensation strategy to attract top talent, leveraging data takes guesswork out of the equation. Your decisions will be based on hard facts as opposed to assumptions and gut feels.

Managing salary expectations

Salary benchmarking is how organizations determine the market rate for each position in their organization. With analytics, compensation professionals can be proactive in identifying gaps in their compensation structure and to fill them appropriately, leading to a reduce risk of talent loss. 

The loss of talent not only increases the cost of hiring, but it is also a loss of productivity; it takes time for a new employee to match the levels of someone who’s been at the job for quite some time.

Investigating pay gaps

Even though businesses strive to achieve pay equity, the wage gap persists and is a major concern across industries. The World Economic Forum estimates that it will take at least 202 years to close the wage gap. You can use compensation analytics to unearth answers to important questions like how the pay varies across races, genders, age groups, and several other factors.

Assessing the effectiveness of sales

Sales compensation is particularly complex and can get quite difficult to administer effectively. But, it’s key to determine if they are getting the return on their investment. In addition to the commissions and bonuses, there’s also the travel costs which can add on slowly yet steadily. With analytics, you can identify who’s performing best, which geography brings in the most revenue, and finally, if it’s worth the cost.

Getting buy-in from management

A lot of these exercises can result in a complete restructuring of compensation and benefits which can result in an overshoot of the proposed budget. Knowing how, when, and where to make changes is an area that requires meticulous planning and flawless execution. 

Compensation management is a function that has to spend money wisely to create the biggest impact. Analytics helps C&B professionals to justify these costs by reflecting past, present, benchmarked trends and precisely identifying ways to put the right amount into the right place. Also, it helps HR professionals identify potential ROI on this spending by reflecting cost savings, productivity improvement and employee satisfaction supported by various researches.  

Choosing the right tech

There’s no shortage of data when it comes to people analytics–HRMS, payroll software, ATS, and more. The sheer volume of data generated by these different tools can be overwhelming and more often than not, drown the key insights in an ocean of data. To leverage the data to make informed decisions, you need a compensation management tool like Compport. In addition to the core analytics like employee turnover and workforce effectiveness, you can also keep track of compensation positioning, employee costs, salesforce productivity, and more. Learn more here.

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The Step-By-Step Guide to Designing a Sales Incentive Plan

The close, the upsell, and the renewal are three things almost every salesperson in the world pursues and are what the organization considers in the appraisal. And three things drive these actions–recognition, skill development, and compensation.

When it comes to assessing the tangible impact of compensation like revenue, market share,launching a new product or service, sales incentives come on top of the list of the many compensation programs organisations administer. 

The motivational theory behind incentives that “the gain you can see in front of you, would be the motivation itself for the sales force to go after it” is pretty much infallible. The opposite effect is also true. When an incentive plan is not designed and explained well, there’s no motivation for salespeople to go above and beyond hitting their targets. A well-designed sales incentive plan aims to create a real, measurable impact on the organization’s bottom-line and induce favorable behaviors.

Here are some tips to help you design a sales incentive plan from scratch:

Identify objectives

The first thing you need to consider when designing a sales incentive plan is identifying your objectives i.e. the reason you are coming up with an incentive plan. It could be to increase revenue, increase profits, promote a particular product, increase customer retention rate, etc. 

Correctly identifying primary and secondary objectives (grow revenue and reduce expenses, for example) will help you decide how you need to compensate your salespeople to help you achieve those objectives

Align objectives with business goals

No matter what the objective is, it must be linked to strategic business needs – New player in the market, achieving growth targets, stretch revenue targets, new product launches, etc. and must be customised to address the desired outcomes.

The overall revenue or profit must be the deciding factor to be eligible for any sales incentive. It not only creates a collaborative environment across the organization but also ensures that financial planning is viable for the business. Further, it encourages cross-selling behaviours, especially where employees are attached to a specific product/service or a line or products/services. 

Know what your employees want

The more motivated your salespeople are the higher your profits go. It’s as simple as that. But, what each employee wants can differ greatly. While it’s not possible to design plans that are unique to each employee, you can limit the gap by:

  • Clearly defining roles like SDR, CSM, AE etc.
  • Create metrics, targets, and quotas based on the different roles
  • Clearly communicating the total value of the compensation

While money is definitely a top motivator, a lot of Gen Y and Z employees prefer other perks like career advancement, skill acquisition, and paid time off. Conduct an internal survey and ask them what motivates them the most. When you understand what drives your employees, you can incentivize desirable behaviors.

Determine the on-target earnings

Before you decide on the incentive and base pay, decide on what a salesperson would be paid annually. This is called on-target earnings (OTE). It gives salespeople a realistic view of what their total compensation might be when their quotas have been reached, including the base salary and the realistic commission. 

Identify the right incentive form

The goal of variable pay is to reward employees based on their performance, especially when salespeople are financially responsible for results. Depending on the goal, you can decide on an incentive framework. This article delves deep into the various sales compensation plans and methods. Take a look and see which one fits your goal.

You also need to consider if your salespeople are interdependent, in which case the compensation should be a team-based pay, or independent, in which case, the incentive plan should be based on an individual’s performance. If there’s a hybrid mode, where there’s a balance of both individual and team work, you can design a weighted incentive plan depending on your unique situation.

Set achievable (but challenging targets)

The world is changing by the day and so are organisational targets. Sales incentive plans that are not agile enough to align with the dynamic marked-to-market approach fail miserably. Many companies make the mistake of embedding targets which are fixed for a year and even if the assumed business targets go completely haywire due to unforeseen reasons, SIP continues to penalise sales employees before it comes for review again.

Choose the right metrics

Sales incentive payout must be linked with business-focussed KPIs and not the ones that drive the behaviour and culture. Many companies struggle when they end up paying higher incentives due to over-achievement of qualitative KPIs such as discipline, reflection of competencies, compliances, etc., while employees don’t end up achieving 100 percent of their core targets. Reflecting competencies, values and following compliance are non-negotiable aspects of any job and should not be rewarded separately. Perhaps these must be used for considering sales people for development opportunities in the company.

Speaking of quotas, the right sales metrics can optimize the effectiveness of the incentive plan. What matters to you the most–number of units sold, number of new accounts, or the bottom-line in your balance sheet. Use three or four metrics that the reps have control over. Nothing is more demoralizing than being appraised on a metric that you can’t even control.

Be flexible

While the philosophy and umbrella plan can be standardised there must be elements of flexibility in implementation for each market (region, country, cluster and even cities) to embed the local needs and nuances such as customer behaviours, culture and high/low seasons.

Sales quotas need to be fair and achievable. You need to be aware of potential pitfalls of a particular territory and a sales rep handling a challenging territory can not be benchmarked against a territory with higher sales potential. It’s best to consult with sales managers to understand these factors before you arrive at a number.

Set the right payout timings

Incentive plans must deliver immediate and substantial gains to the sales force to keep the excitement and motivation levels high at all times. The most common failure of these plans is to operationalize it with discipline and within prescribed time. Monthly payouts reduce the hockey stick effect when a disproportionate number of deals close during the end of the quarter. The industry standard to pay commissions and incentives is one pay period after the quarter’s close.

You can also design a plan to pay part of it on shorter frequency but still keep the overachieved incentive payable towards the end of the year.  This can serve a greater purpose both in terms of employee retention for longer periods as well as removing the chance of incentivizing employees for bad sales. Such a hybrid model becomes particularly important when the customer onboarding cycles are longer than the incentive period itself.

Automation is the straightforward answer for this challenge. A good compensation software not only manages the process effectively, but also has an embedded incentive simulator for employees to calculate their potential incentives themselves can be highly effective and encouraging.

Review your plan

Audits and reviews are one of the most important parts of an SIP. To avoid failures, have necessary compliances from both ethics or regulatory perspectives. It is imperative to have a strong non-biased audit and review team that continuously monitors the actual performance of sales incentive, market dynamics and business needs.

Typically, incentive plans must be self funded from the additional revenue or net profit. Ideally can range from 1-2 percent of the above budget revenue gain or 4-5 percent of the above budget net profit gain depending upon the profit margins of brands in scope. The danger of not looking at this perspective at the design stage itself is to end up paying from the fixed sales budgets, which no business leader wants to sponsor.

Create the contract

The last step in designing a sales incentive plan is coming up with the contract. It needs to be simple to understand and communicate the plan clearly without confusion.

Closing thoughts

An effective sales incentive plan is easy to implement and administer, keeps the sales people happy and motivated, and doesn’t affect the company’s bottom-line. It benefits everyone. You need to keep it simple and ensure there’s a direct correlation between incentives and improved sales. It needs to be fair and should be administered in short durations.

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Blogs

The One-stop Guide to Sales Compensation Plans

Choosing the right compensation plans for sales teams is critical for any organization to attract and retain top talent. A fairly designed plan will keep sales people motivated, appreciated, and feel valued while a poor one can cause even the best employees to leave.

However, creating an effective sales compensation plan is not an easy task. In fact, it is tricky even because of the dozen variables you need to balance to ensure fair pay. When developing a pay structure, you need to ensure that both the employees and the management are happy. Getting this right will keep your star sellers motivated and hit targets continuously while increasing profit margins. 

What is sales compensation?

Sales compensation is a combination of base salary, bonuses, commissions, incentives to attract, retain, and motivate salespeople. Its primary objective is to drive performance and incentivize specific positive actions that are beneficial to the company. It also sets the standards and expectations for compensations and drives a result-oriented team.

With the right sales compensation plans, organizations can reward desired behaviors that drive better and consistent revenues on a recurring basis. You can improve your sales compensation planning greatly by using compensation planning software like Compport that are built to give you the relevant insights without relying on guesswork.

Types of common sales compensation plans

Here are some examples of the most common types of sales compensation plans:

Straight salary

In the base salary only compensation plan, salespeople get paid a predetermined amount, irrespective of how much they sell. It is not a common approach to sales compensation because there’s no motivation for sales reps to go the extra mile after they have hit their sales quotas. So the base salary needs to be extremely competitive to attract and retain talent. However, small sales teams that are versatile and focus on multiple functionalities still have a salary only plan.

Commission only

This is when you pay sales reps exactly for the revenue they bring in and nothing more. It’s a rather uncommon approach even though it’s easy to administer. However, it is difficult for organizations to predict their expenses and have to stick to a tighter budget. 

Also, for salespeople, it leads to low income security and stability during certain months or volatile periods. It tends to attract fewer candidates, increase burnout, and can lead to high attrition.

Salary plus commission

This is one of the most common forms of sales compensation where sales reps get a base salary along with an agreed-upon commission based on the value of each sale. There are multiple versions like a flat percentage or a slab structure. Usually, the base salary is low and the commission makes up for the lion’s share of the employee’s salary. 

It’s favorable to both employees and employers because it motivates sales reps to sell more and go beyond sales goals and can increase their earning potential while offering some sort of stable income. Employers have less variability and can predict their expenses with reasonable accuracy.

To arrive at the base salary, you need to consider the difficulty of the sale, lead generation autonomy, and the experience required. As for the variable compensation, think about the complexity of the sales cycle and the influence the salespeople have over the customers’ purchasing decisions.

Salary plus bonus

The base salary serves the stable, foundational part of the rep’s compensation. As opposed to the commissions on each sake, employees are paid a lump sum once the pre-set targets are reached. It gives a much clearer level of predictability while motivating your employees to hit targets and close more deals. 

One disadvantage of this model is that there is no incentive for sales reps to over-perform once they hit their goals and their bonuses are secure.

Territory volume-based commission

Team selling is common these days and this approach is catered to such organizations. Sales teams work on leads and prospects from clearly defined regions or territories. Commissions are paid on the total sales from each territory split equally among all reps as opposed to an individual-sale basis. This mode of compensation works when your team has great camaraderie and can support each other to achieve team targets. Also, the territories need to be clearly delineated so as to avoid clashes and should be rich enough to support competitive commissions. 

Profit-margin based commissions

These plans are common among companies where salespeople have more autonomy over offering discounts to close deals. Reps are compensated on the profit the company makes on that deal instead of the value of the deal or the revenue generated. This discourages salespeople from giving fat discounts to close a deal. However, it becomes difficult for employees to maintain a stable income during lean periods. 

It works great when you combine it with flex times, stock options, and other incentives that attract salespeople. 

How to design a sales compensation plan

Since the performance of your sales team is heavily dependent on their compensation, you need to design a plan that can keep them motivated to go over and beyond without them getting burnt out. You should also communicate the total value of their compensation clearly along with caps, if any, and the total earning potential. 

There’s no one-size-fits-all sales compensation plan and it needs to be customized based on the organization’s budget, resources, and goals. You can either offer a higher base salary or plans where commissions and incentives for hitting targets take precedence. Every compensation plan should be based on the following factors:

  • Job role
  • Sales cycle length
  • Departmental budget
  • External competitiveness
  • Deal types
  • Organizational goals

If you’re building a sales compensation plan from scratch, make sure you go through the following steps:

  • Identify your objectives. Ex: Increase revenue, increase retention, increase cross/upsell rate, increase contract length
  • Align compensation strategy with sales and business objectives
  • Establish role levels
  • Choose a structure based on the above examples. Determine base pay, commission rates, etc.
  • Set quotas, targets, earning caps, and expectations for compensation
  • Assess pay competitiveness based on location, industry, etc.
  • Get inputs from executives, senior salespeople, and other stakeholders

In addition to all these, you also need to pick the right compensation management tool so you can administer the plan. One of the biggest challenges HRs face is compensation errors. A small manual error, something as small as 1%, can add up quickly and can cost your company a lot of money. There’s always the risk of adding an extra zero or a decimal in the wrong place. But the true cost of inaccuracy is even more; your employees lose trust when their bank balances don’t match with their expectations.

You need to automate as much as you can when it comes to compensation. Pick a tool like Compport to eliminate errors and you can rest assured that each commission is calculated accurately. Further, you also get insights to modify and improve your plan. Get a free demo today.

Closing thoughts

Keeping the sales team happy and motivated is critical to the success of any organization. You want to create a plan that will help team members succeed. The compensation plan should be easy to administer, simple enough for salespeople to understand, and reward them for their performance fairly.  

A skilled team when properly incentivized will achieve great results, increased revenue, and business objectives.

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Blogs

Calculating the ROI on Compensation Software

No matter the size of your company, whether it is a 1000-person strong workforce or a company that is just starting out, compensation management is crucial for success. To ensure your employees’ needs and expectations are met, they must be rewarded fairly for their contributions to the business objectives. Compensation is an essential element in attracting and retaining top talent, and in achieving the strategic goals of a company. 

The need for tech in compensation management

When companies are small, say less than 50 employees, organizations tend to handle compensation manually using spreadsheets with reasonable accuracy and ease. According to Ventana, 35-40 percent of organizations use spreadsheets to manage their compensation. And with good reason. Spreadsheets are versatile tools and are effective for tracking, calculating, and charting the numbers. But, they lack the critical functionalities you need to effectively administer compensation.

As the workforce increase in size, compensation management becomes a strategic element for you to achieve your business objectives, and manually managing compensation may lead to disastrous results:

  • Expensive data entry errors 
  • Compliance issues
  • A lack of transparency
  • Workflows become inefficient
  • Difficulty in scaling operations
  • Not sufficiently empowering managers in compensation decisions

The risks of using spreadsheets for managing compensation planning are enough to inspire a search for something more efficient. Savvy HR leaders know that there are a lot of moving parts like commissions, bonuses, long-term incentives and organizations must go from a manual, tedious, and error-prone approach to more sophisticated ways and reap the many benefits compensation management tools offer.

A comprehensive compensation management system like Compport is built specifically to manage the entire process–from planning to budgeting to execution and communication–can save you significant time while increasing the accuracy and efficiency.  It helps HR leaders and compensation professionals manage ‘total rewards’ as a strategic enabler in their organizations. Further, Compport can:

  • Handle any compensation related complexity with ease and serve diverse needs in your organization
  • Link market data to compensation and rewards decisions to ensure pay equity across your organization.
  • Run multiple simulations, compare the budget impact, and chose the best-fit one
  • Ensure strong compensation governance
  • Access to real-time, multi-dimensional, and intuitive compensation, reward and benefit analytics, and reports
  • Empower managers to make informed rewards decisions
  • Make your compensation communication more efficient and effective and increase the perception of fairness

But, given HR is a non-revenue producing department, how do you justify the use of compensation software?

Calculating the ROI of compensation software

Return on investment (ROI) is a critical metric in the selection of any tool and compensation management is no different. We conducted a study with our existing customers to examine the value organizations realize by deploying Compport and to better understand the benefits and risks associated with using compensation management software in general. We aggregated the evidence and feedback from organizations of varying sizes, to create a financial model that justifies the benefits derived from such an investment.

We estimated an average of 

  • 40 times return on investment,
  • 90 percent resource efficiency, and 
  • 10 percent impact on turnover. 

Please note the numbers mentioned here were derived, as unbiasedly as possible, from Compport’s customers and might not accurately reflect the ROI your organization will realize. Use your own framework to estimate the ROI of an investment in either Compport or other compensation management software. 

You can calculate the estimated ROI for your organization by taking into account the costs and the benefits reaped. Add all your costs toward the software like set up fees, implementation charges, support, and maintenance fees. If there’s a steep learning curve, add labor hours to the cost as well. It’s important to calculate the entire value of the investment to truly reflect the ROI.

For calculating the return, consider the following factors:

Reduced turnover costs

When employees have more clarity and control around their compensation, using self-service portals it can increase job satisfaction and thus has an impact on the attrition. At least 40 percent of employees quit because they feel they are not paid fairly. With a tool like Compport, you can gain insights into pay gaps and inequities and take measures to fix them before they cause irreparable damage. And, reduced turnover means reduced hiring needs.

Employees who are satisfied in their current roles are likely to stick around and thus your retention rate will be high and you can save on hiring new employees as well as the cost of training them. A good way to go about this is to compare data from other companies in your industry.

Estimate the costs associated with interviews, onboarding, and training new hires.

Speed and agility in rewards processes

Manual work costs real dollars. Track the actual hours your team spends on reviewing compensation, calculating pay, delivering up to date job descriptions, updating employee information, onboarding, and convert that into its monetary equivalent.  You also need to consider peak months when audits are frequent and the benefits of using software tools are at their peak.

It can be daunting to keep track of the hours worked and can raise some eyebrows but explain the reasons behind this clearly so the people doing these manual work understand how much time they could save by automating the drudgery.

Compensation teams becoming less administrative and more strategic 

Try to figure out the efficiency in the workforce when you automate all the administrative tasks in managing compensation. Depending on the complexity of the compensation processes, automation may lead to optimization in the headcount in the HR Team and/or it can help you better utilize the intellectual resources that you have since you will be shifting from being administrative to strategic.    

Accountability and ownership 

If the compensation processes are not sufficiently automated, organizations tend to cascade compensation decisions to a certain level only, not whole levels of managers in the organization. This limits the empowerment of managers and the accountability & ownership around the rewards decisions. If an organization can not create ownership at all managers, there is only little chance to create full-understanding and trust among the employees with regards to their compensations. Automation can help you to give better experience to your managers and employees in any compensation processes, which would yield engagement/ productivity and performance benefits.

Whether it is sales incentive simulation or clarity on bonus calculation for non-sales, automation will enable it all with ease across the board. If a scheme is not working well, no one needs to wait for the end of the period – automation will make it quick and easy to change schemes on the fly.

Also, if your compensation technology is enabling you to effectively and efficiently communicate compensation and rewards decisions with your employees, this would surely contribute to the ‘fairness’ perception and increase the trust to compensation related decisions. If you can achieve this with the power of automation, this would bring more engagement, productivity and thus higher performance.

Closing thoughts

Add up all monetary and non-monetary values and divide that by the total costs incurred for implementing the software and you arrive at your estimated ROI. Extrapolate these numbers to future years to see how you can continuously derive benefit from using a compensation management tool. 

Given the business impacts at stake, organizations have a compelling business case for investing in a compensation management solution. With the right solution in place, HR teams can shift from a tactical approach to more strategic efforts, including improving the quality of manager decisions about compensation and refining and communicating compensation strategy.

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Blogs

5 Compensation Management Challenges You’re Likely to Face as an HR

Managing compensation is one of the most difficult aspects of being an HR professional, irrespective of the size of the company. Compensation professionals in the HR department face issues in determining the right pay and relevant perks that recognize and reward employees for the contributions they make to the company.

The operations and processing can take a huge chunk of your time. It is more pronounced in companies with a workforce that spans across different geographies. In smaller companies, the challenges are of a different kind; most small businesses are limited by budget and so the extent to which these companies can go to attract new talent in a competitive landscape while being fiscally responsible to themselves is small.

Let’s take a look at the most common challenges when it comes to compensation management and how you can overcome them.

External competition

We live in an incredibly competitive world where businesses are willing to pay top dollar to get the cream of the crop talent. In order to attract and retain talent, your company must establish a compensation package that’s on par with other companies in the same industry and location. 

There are several market surveys to gauge the right pay for different roles. If you’re constrained by budget, you can innovate by offering attractive vacation time offs, child care facilities, and other benefits that don’t cause a dent on your budget.

Executive compensation

The many nuances of compensation management come into play when deciding the salaries of senior executives. This is particularly important for public companies that need to reveal the salaries of their top 5 employees which might not go well with shareholders and the general public. Even if that’s not the case, the pay packages need to strike a balance between attracting good talent while being acceptable.

Internal equity

Take a pay review and we’re sure you’ll be surprised by the results. Even though the government and businesses strive to achieve pay equity, the wage gap persists. In fact, the World Economic Forum estimates that it will take at least 202 years to close the wage gap.

You should continuously assess your pay gap efforts and create awareness in the senior management to fix this issue. Managing gender wage gaps is something that’s so close to our hearts so much so that we wrote a whole blog about it. You’ll find it here

Gaps in employee expectations

There’s always a conflicting disparity between what the employee expects to be paid and what the organization wants to pay. And, the HR is stuck in between. Also, employees usually don’t take into account the entirety of their compensation package. They only consider the net pay. 

You can bridge this gap by providing total compensation statements to clearly communicate the value of their compensation in its entirety.

Lack of digitization 

Managing compensation and communicating the outcomes is a very effort-driven task. When not done digitally, it can take up to several months from design to implementation and finally to communication and requires a lot of data crunching/ formulas/ sheets on Excel. Obviously, it’s not the best use of your time nor skills. 

Spreadsheets and legacy software force you to focus on administrative details, most of which can be automated by using online compensation management software like Compport. It can simplify your processes, save your time and resources, and enable you to design smarter, engaging compensation plans for your workforce. According to real-life examples with different Compport clients, it has been proven that Compport can bring in 95 percent more efficiency.

Closing thoughts

Your compensation strategy should be connected to business goals and financial data so you can get a complete picture of its effectiveness. When wrongly handled, it can cause a rift between employees and management. Though these challenges may seem daunting, proper planning and diligent efforts can help you overcome them. The right tools will help you move beyond manual work and transactions and focus on what’s important–motivating your employees and building a great culture.

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compensation management

Everything You Need to Know About Total Compensation Statements

It’s quite common that employees only take salary into consideration when thinking about compensation. Your benefits package might be substantial yet employees may not fully understand the total value of the compensation they receive. These might include “hidden benefits”, which are usually non-monetary, like healthcare, paid vacation days, and many others. 

According to this report, the value of employer-paid benefits in private industries in 2017 was 30.5 percent of the average worker’s total salary. This means an employee perceives his compensation to be only two-thirds its actual value. To show the true value of their compensation package, businesses provide total compensation statements to all employees with the benefits factored in.

What is a total compensation statement?

Most of an employee’s compensation extends beyond the base salary. The total compensation statement (also known as total rewards statement) is a document that communicates the full value of an employee’s compensation package–both direct and indirect benefits. 

It gives employees a broader, high-level picture of the compensation they receive and is usually sent to employees once a year.

Why are total compensation statements important?

By the late 2000s, organizations realized they needed to offer a lot more than the base salary to keep employees incentivized to do great work and offer value. But, offering more perks isn’t enough. You need to make sure that employees are aware of what the business provides. One of the key ways top-performing organizations improve employee engagement and retention is by being transparent and sharing the entirety of their compensation. 

Helps employees understand their contributions

According to employee engagement expert Leigh Branham, “There is no more emotionally charged issue for employees than what they are paid for their contributions. What we make doesn’t just pay the bills—it measures our worth in the most material way.” The total compensation statement empowers employees by giving them a clear picture of their compensation and helping them understand the extent to which the organization has invested in them. 

Increases retention and loyalty

Knowing the full value of their compensation can boost employee morale and loyalty. Total compensation statements can be powerful retention tools.  In fact, CEB research shows that improving total rewards communication can lead to a 50% decrease in turnover risk. 

Improves employee performance

Providing these statements are also beneficial for encouraging high performance because they reiterate the ways in which top-performing employees are recognized for their contributions. When employees feel that their efforts are appreciated, they may be more inclined to contribute their best efforts to the company continuously.

What should you include in the total compensation statement?

Total compensation statements provide a complete break down of all aspects of the job’s benefits. It includes the monetary equivalent of all forms of compensation from the employer. The more detailed your statement is the more beneficial it is. 

The TCS consists of two major sections–direct and indirect compensation. Direct compensation includes the base salary and other extra financial compensation like incentives and bonuses. Indirect compensation includes the dollar value of the employer’s contribution to taxes and other benefits. This summary is often referred to as the hidden paycheck.

The following are the components of a typical total rewards statement:

  • Base Salary/Wages
  • Bonuses and commissions
  • Paid time off
  • Health/Dental insurance
  • Retirement funds
  • Tax contributions
  • Stock options
  • Perks like child daycare, gym membership, commute passes, etc.

Tips for creating effective total rewards statements

Here are some useful tips to keep in mind when creating total compensation statements:

  • Make it visually appealing with charts and graphs
  • Provide comparison with market data
  • Ensure all the data is accurate
  • Don’t double count line items–it’s quite easy to add paid time off on top of base salary
  • Consider adding net benefit amounts i.e. take into account the expenses incurred by the employees for any particular benefit
  • Only add the benefits employees are eligible for

Challenges in creating total compensation statements

PayScale’s 2018 Compensation Best Practices Report says 40 percent of top-performing companies are likely to use total compensation statements, compared to 36% of typical companies. If total compensations were so effective then why are a lot of companies not doing them?

Employee dissatisfaction

One of the main reasons companies refrain from creating total reward statements is because they feel employees might not be satisfied with the benefits they receive. The statement makes it easy for the workforce to compare it with peers as well as market standards.

But, these statements are actually doorways to open communication and career path conversations. If employees feel their earning potential is limited at your company, and not at par with the market standards, it’s critical you explain why that’s the case.

Accuracy of data

Another reason companies avoid these statements is in fear of giving inaccurate data. Accuracy of data is pivotal when it comes to creating any payroll-related statements. Also, the monetary value of the benefits changes with time and your statements need to reflect those.

If employees feel the data provided is not accurate, it may erode their trust in your organization. There might be benefits they are either not entitled to use or indifferent. In such cases, the statement might seem like a ploy to artificially inflate their compensation.

More paperwork

This is one of the most common reasons for organizations not handing out these statements. Creating total compensation statements for all employees can be a lot of work and can take weeks to process. 

How can Compport help?

Total compensation statements are crucial–but creating them manually isn’t the best use of your time or your skills. 

Our easy-to-use solution will help you communicate the full value of the compensation you provide to your employees, helping you drive loyalty and retention. The best part is that you don’t have to spend days and weeks on it. With Compport, you can create total rewards statements for all your employees in just 4 basic steps;.

 1-Upload your data

2- Choose a total rewards statement template from our template library or simply create your own

3- Generate the statements, and 

4- Distribute it to all employees with one click, digitally.

Closing thoughts

A company can invest a lot of money on its employees but if they don’t recognize the value of that investment, the organization is, in fact, wasting money. Helping members of your workforce understand the value of the benefits you offer may make them reconsider taking another job, especially if your benefits package is robust. Ensure the statement is accurate and that employees know where to find it, and it will be that much harder for your top talent to jump ship.