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Understanding Compensation Management: Two Different Worlds

Management of compensation is arguably the most important strategic process in a company. Compensation is often a company’s largest expense and is critical for its ability to attract, retain, and motivate talent. It can be used as a tool to align employee behavior with company strategy and drive top-line performance. If managed well, it can prevent damaging legal and reputational risks, and help a company rise above the competition.

In this series of articles on Understanding Compensation Management, we present a primer on the functions and concepts involved in managing today's compensation, along with best practices and key system requirements.

Talking the talk

Compensation management is the process of planning, allocating, approving, and delivering monetary or non-monetary remuneration. Good compensation management involves doing that in a way that is efficient, accurate, timely, legally compliant, effective, transparent, and fair.

Compensation management practitioners have tradecraft and special vocabulary that make the field unique. Compensation is typically managed using spreadsheets, homegrown custom-developed systems, general HR software, or dedicated compensation management software. 

For further definition of the terms used here and other compensation terminology, refer to the beqom Compensation Glossary

If you are looking for a better way to manage compensation in your company, consider the capabilities described here as you evaluate different solutions.

The very different worlds of HR and Sales compensation

The compensation world, and the market for its management systems, has historically been split into two distinct areas: 

(1) broad-based compensation such as salary, bonus, and long-term incentives like stock plans, managed by HR, and 

(2) sales incentive compensation like commissions, typically managed by Sales, IT, or Finance. 

This bifurcation has prevented companies from having a unified view of total compensation (a problem addressed by beqom). Why the split?

Sales incentive compensation is a special animal

Sales commissions typically are transaction-based and may involve complex calculations. Each sales transaction likely generates a commission payment, and that payment may need to be split amongst different sales reps or managers in a process called sales crediting. Commission plans can be quite complex, with tiered commission levels, commission rates that vary by product, region, or other factors, and accelerators or kickers for limited-time special promotions. The calculations may reference quotas and sales territories, which in themselves can have complex structures. And that’s not even counting actions like draws, carries, and clawbacks.

With a large salesforce, different sales channels, and many products and customers, the number of sales transactions for a large company can reach into the millions each month. This volume of data – combined with the complexity of crediting each transaction to the right parties and performing sophisticated commission calculations – requires special architecture not found in standard HR software. The more complex the formula, the more likely a company will need resources like a crediting engine, rules engine, and territory and quota management tools. 

Sometimes, this is managed by Sales because they want direct control of how their reps are commissioned, and because it ties directly into quota and territory management. Other times, this is handled by IT because it requires a lot of data integration and heavy processing. And sometimes this is overseen by Finance because it is a large variable expense that they want to keep close tabs on. In any case, it’s seldom managed on the same platform used by HR for compensation (unless you’re using the beqom Total Compensation platform).

HR compensation is simpler, but...

By comparison, the world of HR compensation is much simpler. Salaries are often reviewed just once a year, and bonuses and long-term incentives are awarded annually, or perhaps quarterly or half-yearly. 

Still, in large companies, these processes can be quite complex and resource-intensive – especially in multinational companies, and especially where compensation is used strategically to drive performance. When companies use variable incentive plans to reward the activities and results that will lead to meeting strategic objectives, it can result in many bonus plans that are driven by many metrics and key performance indicators (KPIs).

Stay tuned...keep learning

Want to learn more about the many facets of managing compensation? In this blog series, we will dive into the different aspects of compensation management to help you understand how to best make compensation work to deliver results for your company while also being efficient, accurate, timely, legally compliant, effective, transparent, and fair. Future blogs will deal with:

  • Salary planning
  • Salary reviews
  • Bonus plans
  • Long term incentives
  • Sales incentive compensation
  • Unified compensation

For a review of compensation terminology, refer to our online and downloadable Total Compensation Glossary. To find out how beqom’s compensation platform can help you transform the management of total rewards at your company, request information or a meeting with one of our compensation experts.


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