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Why Is Compensation Management So Challenging in Financial Services?

Many financial services (FS) firms experience limitations when using spreadsheets or standard HR software to manage compensation. So why do these tools fall short? The answer, much like the needs of the FS firms, is complex.

Hanging in the balance is operational efficiency, control of compensation spend, competitiveness in attracting and retaining talent, ability to drive performance and execute strategy, and meeting compliance requirements.

Dedicated compensation management software may provide the answers to problems that home-grown solutions cannot address, while also delivering a solid return on investment.

Below is an excerpt from our eGuide, The ROI of Compensation Management Software for Financial Services. Download the full eGuide for details on how you may benefit from dedicated compensation management software. It will also help you build a business case for digitizing your compensation processes.

What is compensation management software?

Not to be confused with overarching HRIS, HCM, or talent suites, compensation management software is purpose-built software (including software-as-a-service) that helps a company to run one or more of its compensation processes, such as salary merit increases (which may include performance reviews), bonus plan administration, long-term incentives such as stock plans or other deferred compensation, executive compensation, sales incentives such as commissions or performance-based incentives, as well as the planning, approval, and communication processes for any of the above. Often “compensation,” “rewards,” and “remuneration” are used interchangeably.

What are the challenges faced in Financial Services compensation?

Compensation in financial services is unique, and legacy solutions—whether spreadsheets, bespoke in-house systems, or core HR suites—don’t support total rewards management at the level of sophistication financial services teams require. Among the considerations:

Unique compensation models. Because of the complex operating models behind pay-for-performance strategies, financial services compensation is non-standard and different at every firm.

Need for tailored rewards. To engage, motivate, and retain today’s workforce, managers may need the ability to tailor individual compensation plans to meet employee needs and expectations.

Historical reliance on spreadsheets. Typically, compensation processes have relied heavily on Excel spreadsheets, which raises issues of transparency, accuracy, and version control. The use of spreadsheets compounds every other issue listed here.

Lack of a single source of truth. Without a central compensation data store, time is wasted searching for and consolidating data when managers or employees request pay information. To pull the compensation history for an individual and then format the data into a consumable format can take HR professionals or managers away from more strategic work.

Complex modeling requirements. With a plethora of products and services and incentive schemes that can change frequently, it becomes important to be able to create models and simulations to predict the impact of proposed compensation models.

Complex organization structures. Financial services firms often have complex management hierarchies, with matrixed rules and employees across global locations where data can be in the local or consolidation currency, with mobility and exceptions.

Data in different systems. To plan and calculate compensation requires data from many different sources, such as the systems for Compensation/Rewards, HR central data, Benefits, Financials, Marketing, and Sales, as well as external market benchmark data.

Complex compensation cycle. The financial services compensation cycle is complex, involving setup, recommendations, review and approval, communications, and payment, with multiple cycles in a year. Often it requires a lot of side processes in Excel and other means, leading to inefficiencies, errors, and lack of transparency and controls.

Sophisticated pay calculations. Specialized needs like clawbacks, carried interest, prorations based on mobility or other factors, multiple plans and funding pools, or multiple LTI instruments and vesting schedules, make financial services compensation complex to calculate.

Need for regulatory compliance. Regulatory requirements abound in financial services, and can vary from company to company, depending on the exact businesses they are in. To comply and produce the necessary reports can require a lot of manual work. Data centralization and transparency are key, and spreadsheets just don’t provide them.

Many stakeholders to satisfy. On top of all the aforementioned challenges, add the many stakeholders who expect to have their needs met in relation to compensation:

  • Senior Management and the Board care about compliance and transparency.
  • Executives want to drive results.
  • Line managers need data to make informed decisions about employee pay.
  • HR Business Partners want efficient processes for administering rewards.
  • Employees want to understand why and how their compensation was calculated.
  • Partners, producers, and agents want timely, accurate commission payments.

One thing all of the above have in common is the need for transparency and access to data.

How can financial firms address these challenges?

Complex firms need a system that can handle complex compensation. With the above challenges in mind, how can FS firms begin to address them? 

Many firms use spreadsheets for some or all rewards processes but run into limitations quickly. Most firms have software to manage their core HR processes, which generally includes a compensation module. While they are more reliable than spreadsheets, these modules are often unable to handle increasing complexity and diversity at scale. 

Download the full guide, The ROI of Compensation Management Software for Financial Services, to learn more about the challenges with traditional methods and the need for dynamic compensation software solutions in the financial service industry.

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