People analytics experts are finding new ways to use data to make better decisions within the Human Resources function, drive value to the bottom line, and increase employee satisfaction. One such focus area is compensation. With the majority of companies being service-based rather than product-based, the largest expense line in the financial reports is often the cost of the workforce. Because of this, compensation analytics has become a strong focus for executives that need to keep costs in line with revenue to maintain a healthy, profitable company.

What are the benefits?

New technologies have emerged to help companies manage multiple aspects of compensation management. Previous versions of compensation management software were centered around goal management and alignment. These technologies have progressed to include a valuable suite of data analysis features. In expert hands, this data can be used to create several benefits for enterprise organizations.

1. Protecting the bottom line

The first benefit of compensation analytics is in the ability to protect a company’s bottom line. As economic times change and as industries and their products/services move through their life cycles, there can be substantial fluctuations in revenue over time. In times of decreasing revenue, it becomes crucial to control costs in order to maintain profitability. With the cost of the workforce being a large percentage of most companies’ costs, CFOs turn to the value of compensation analytics to make strategic decisions on how to manage the workforce.

2. Eliminating guesswork from your decision-making

The second benefit lies in using data to make a decision where Human Resources and management previously used “gut instinct” for decision-making. When a good employee tenders their resignation, the natural instinct of their manager is to get approval to make a counter-offer. But without data, how can a company tell whether it is a wise decision for the company to make such an offer? In the case of an already highly compensated employee, issuing a counter-offer may adversely skew the compensation within his / her job category. That can lead to additional problems when it comes to pay fairness. In other situations, you may find that the employee in question appears to be under-compensated for their role. In either case, it is the availability of compensation information across the enterprise that allows managers and Human Resources to make better and more equitable decisions.

3. Assessing pay equity

The topic of pay fairness has received a great deal of press across multiple countries, particularly given the mandated reporting of the “gender pay gap” in the United Kingdom and elsewhere. Since the defined pay gap that needs to be reported doesn’t measure pay equity, companies need much more detailed data to conduct an accurate pay fairness assessment. Much of the data required for an accurate assessment of pay equity such as base salary, bonus structures, job classes, and performance values reside inside compensation applications. Statistical procedures in combination with compensation analytics reveal the true compensation picture that can be communicated both internally and externally, and satisfy compliance requirements. This analysis, including modern predictive analytics, can help to ensure that employees are being compensated fairly and without bias, and help to improve retention rates by identifying those at risk of leaving due to compensation issues.

4. Assessing sales effectiveness

For companies that need to determine whether they are getting a return on their sales force investment (ROI), compensation analytics is key. Employees within sales roles tend to be more highly compensated than other employees. With the addition of their expense accounts, the total cost of this team can be substantial. It is imperative for companies to determine whether this team is bringing additional revenue to the company that justifies the team’s total cost and whether the rewards are being distributed fairly and effectively.

Sales team compensation models vary widely and can be quite complex. Having access to the complete details of the compensation for this team will allow upper management to measure the success or failure of this portion of the workforce, and optimize its effectiveness.

5. Transparency of information

A final benefit of using compensation data is the impact that transparency of information has on employee motivation. When organizational goals are aligned throughout the levels of the organization and made visible to all employees, employees have a better understanding of what the company is trying to achieve. With visibility into how team objectives impact compensation throughout the organization, employees will feel a sense of fairness and unity with their fellow employees.

Some companies also publish external salary and cost of living benchmarks to their employees. Visibility into this information not only allows Human Resource teams to make effective salary adjustments each year but also provides the ability to explain to employees why their compensation differs from their counterparts in another area of the country.

These benefits are, by no means, the complete list of what an organization can accomplish with its own compensation data. People analytics experts are expanding the application of data analysis to the workforce every day and pushing the limits of what has previously been possible.

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Editor's note: This article first appeared in 2018 and remains both popular and relevant in 2021.