An ever increasing array of risk and compliance requirements is changing how HR departments are managing their compensation processes, driving the need for mature compensation management systems that can provide the necessary support. So, what does this exactly mean for HR managers?
In the US, the SEC is requiring that companies prove executive pay is directly tied to company performance. Similar requirements have already been enforced across Europe by CRD IV and Solvency II directives. Federal, state, and local laws and regulations all place restrictions on how employers compensate their employees, and therefore require an organization’s compensation programs to adhere to a broad range of restrictions and standards.
At the same time, companies are facing internal pressure to establish that compensation policies are fair and equitable, free from gender bias and other forms of discrimination, to reduce legal risk, boost the employer's brand, and compete for talent.
In order to meet these new challenges, HR managers must guarantee compensation processes are transparent, compliant with external regulations and internal policies, and tightly controlled, with the ability to do the necessary analysis and reporting.
Transparent compensation management is achieved by providing a clear link between pay and performance and by clearly communicating:
- the objectives of the company
- the objectives of the individual and how those are linked to company objectives
- how the employee will be rewarded for accomplishing those objectives.
Providing such transparency results in a clear alignment of individual performance and compensation with the overall performance and direction of the company.
Compliant with external regulations
Rulings from the SEC and CRD IV directives mandate that compensation policies need to be compliant. In order to meet those compliance requirements, HR departments must prove there is a clear link between employee compensation and company performance for the current year as well as for future years, ensuring any variable remuneration is sustainable compared to the financial health of the company and justified according to company and individual performance. The goal of these mandates is to eliminate excessive risk taking which could jeopardize the current and future health of a company.
Compliant with internal policies
Changes in internal policies around Diversity, Equity, Inclusion and Belonging are pressuring HR departments to prove they are paying their people fairly by using consistent and clearly defined compensation rules, rather than the more traditional discretionary approach, and by eliminating conscious or unconscious bias based on gender, race, or other factors.
The result proves to employees that their total remuneration package is competitive compared to the market as well as fair compared to their peers. It also proves to company stakeholders that compensation management is following a tightly controlled and structured process in line with corporate policies.
In many cases, organizations are managing compensation processes in a de-centralized manner. Using Excel spreadsheets and various other data sources make it difficult to manage the processes in a consistent way. This de-centralized approach results in inaccurate reporting data, missed process steps and compensation errors. Those must be resolved in order to meet the above objectives of transparency and compliance.
How are HR departments changing their approach to compensation management in order to achieve transparency, compliance and control? They are leveraging beqom's total compensation solution to manage all compensation processes in one unified platform. With the beqom platform:
Transparency is achieved through:
- a unified compensation solution
- board level reports communicating the clear link between compensation guidelines, actual compensation and performance
- clear employee communication of their total compensation, how it is calculated, how this relates to their performance, and if it is fair compared to their peers
- tracking of the compensation approval and payment processes.
Regulatory compliance is achieved through:
- a clear link between compensation and company performance
- strict bonus deferral rules linking current bonus payouts to future performance goals
- the ability to claw-back portions of the bonus already paid if future performance measures are not met
- the knowledge of who did what, and why something was calculated and paid at any moment in time.
Internal compliance in achieved through:
- a direct link between company performance, compensation plans and individual performance and earnings for the past, current and future year
- fairness and equity reporting across all levels of the organization
- flexible reporting across all levels of the organization
- the knowledge of who did what and why something was calculated and paid at any moment in time.
Control is achieved through:
- a centralized approach to managing all compensation & performance processes
- centrally defined compensation guidelines and rules ensuring compensation management moves from a discretionary process to a rules based process.
Managing risk and compliance is too important to be attempted using systems that do not provide the necessary capabilities. Even if using a Human Capital Management (HCM) software suite, you may not have the compensation management functionality you need. For an aid to help determine whether your HCM software is capable of meeting your needs for managing total rewards, try our free online assessment, Evaluating Your HCM Platform for Compensation Management. It only takes 5 minute to complete, and may start you on the road to total rewards maturity.
Editor's note: This article has been updated from the original published in 2015.