What Is Compensation Management?

Pays based on accomplishing specific activities or milestones; does not involve a quota. For example, a rep might be paid $500 for each sale of Product X, or $100 for each net new customer contract.

Increase in the commission rate for higher attainment levels. For example, commission rate might be 3% on the first 200k of revenue, 4% on the next 200k, then 5% for everything over 400k. Or can be based on quota attainment, for example, 3% up to 80% of quota, 4% from 81-120% of quota, and 5% over 120% of quota. Also known as a "kicker".

Amounts to be held in reserve to pay expected future compensation that will be due and payable at specific points in time. This is important for the Finance group in their financial planning and reporting, as it represents a liability and has an impact on cash flow. A compensation system should be able to forecast needed accrual amounts.

A performance review which is performed on each anniversary of an employee's hire date, and may be tied to a pay increase. See also Focal Point Review.

Application Programming Interface; refers to a connector between two software applications that allows them to communicate with each other and send data back and forth. A compensation application may provide APIs to communicate with other systems such as HR, CRM, ERP, etc.

Many compensation processes require review and acceptance of pay decisions. These approvals may follow a simple reporting hierarchy, or may be more complex if there are matrixed responsibilities where multiple approvers need to sign off on a pay decision. Approvals (and rejections), along with any reason codes or commentary, should be recorded and tracked in a traceable way to allow for auditing and compliance.

A computer technology, often used in conjunction with Machine Learning, that can analyze massive amounts of information and be used to support compensation tasks like establishing localized pay scales, ensuring pay equity, removing bias from compensation decisions, predicting performance, optimizing costs, and improving the employee experience, among others. Use of AI-driven compensation technology can mitigate the risk of employee turnover. (See also Machine Learning.)

Revenue recognition rule by the US Financial Accounting Standards Board (FASB), with a similar rule (IFRS 15) being issued by the International Accounting Standards Board (IASB), dealing with revenue for contracted goods or services that are delivered over time, such as software subscriptions. In dealing with the complexities brought about by these time-based revenue recognition rules an automated system can greatly reduce administrative time and effort while improving accuracy.

The degree to which a measurable target or quota has been achieved, expressed as a percentage. Often a factor in sales incentive or bonus calculations.

Wages paid for work for a specified amount of time, usually expressed as an hourly rate. Does not include overtime or incentives.

The fixed portion of an employee’s compensation, usually expressed as an annualized amount in compensation planning and analysis.

Comparing job descriptions and/or pay scales to standards for a given industry and/or market, to help determine fair and competitive pay rates. Benchmark information can come from a variety of providers who conduct salary surveys. The median pay for a given job can be used to calculate a compa ratio.

Non-wage compensation, such as health insurance, paid time off, retirement plans, wellness programs, and other considerations that add value to an employee's compensation package, and aid in attracting and retaining talent.

Variable cash compensation. May be discretionary (based on management discretion) or objectives-based (based on achievement of predefined objectives, actions, or production metrics), and may have components that are based on individual, team, and company goals. Generally paid on a fixed cycle, such as quarterly, half-yearly, or annual. The target bonus may be based on a fixed amount or a percentage of base pay.

A compensation budget that is developed by looking at the projected costs of paying the employees that are projected to be needed during the budgeted period, according to the proposed compensation plans, and aggregating those amounts to arrive at the total company compensation budget. Generally done at the department level and rolled up.

Compensation amounts allocated to individual departments. See "top-down," "bottom-up," and "zero-based" budgets.

Designated amounts of money for a given unit or subunit that then may be allocated within that unit, for a given compensation process, such as salary merit increases, bonus payouts, or promotions.

An upper limit on a commission that can be earned in a given period, typically expressed as a percentage of quota attainment. For example, if the cap is 120% and a rep achieves 140% of quota for the period, the rep will only be paid 120% of the commission target.

A form of performance bonus used in private equity and hedge funds, based on the firm's performance. It is typically a percentage of profits, but only paid above a certain rate of return (hurdle rate), and may have other restrictions and provisions.

The process of managing incentive compensation for external sales channels such as agents, agencies, and distributors. This requires accurate calculation of performance-based incentives due according to the contracts or incentive plans in place for each participant, and the timely and transparent payment and communication of the incentives.

Requiring return of compensation previously paid to an employee based on contractual provisions regarding fraud or misconduct or a future financial restatement or serious decline in performance. Most often used in the financial industry.

Pay that is earned from sales of a product or service in a given time period, based on the applicable commission plan(s), to be paid at a designated time. (See also Commission payments.)

Payments of commissions earned. Normally at designated intervals such as monthly or quarterly. Earnings and payments need to be tracked separately to support deferred comp, retroactive adjustments/clawbacks, year-end true-ups, or different payment cycles for different plan components/targets. (See also Commission earnings.)

A delineation of how commissions will be calculated and paid. There are many different plan structures, including Absolute, Relative, Straight-line, Tiered, Territory volume, Gross margin, and others.

A report of the commissions earned by a sales rep during a given period. Statements should enable reps to see exactly how their commissions were calculated, including showing the underlying sales, how the sales were credited/split, and the commission rate applied.

A ratio that indicates how a given salary compares to a standard. The standard may be the midpoint of the internal pay range for that job, or may be the median salary for the same job based on external market benchmarks determined from salary surveys. The compa-ratio is the salary being paid divided by the internal or external median salary. So if the salary is 125,000 and the range for the position is 100,000 to 130,000, the compa-ratio would be 125k/115k or 1.09.

The total financial and non-financial rewards an employee receives in exchange for work, including base salary, bonuses, incentives, equity, and benefits. Compensation is a key component of talent management, influencing motivation, retention, and organizational equity. Effective compensation management ensures fairness, compliance, and competitiveness, often requiring technology to manage complexity and support pay equity initiatives.

Determining the cost and distribution of all compensation elements. The two most common approaches are top-down and bottom-up. Another approach is zero-based budgeting. See the definitions of those terms.

The process of planning and delivering compensation, generally consisting of evaluation, setup, recommendations, review & approval, communication, and payment. Also called a Compensation round.

Planning for the complete compensation cycle, including designing compensation plans, running simulations, creating budgets, generating accruals, managing the review and approval processes, communication, and reporting.

Projecting the distribution and cost of compensation for a given time period. Often done quarterly, to provide Finance with up-to-date accruals. Your compensation system should enable you to take the latest performance forecasts and use them to generate an updated compensation spending forecast, using simulations to allow the performance assumptions and current compensation plans to calculate projected payouts.

The collaborative process of designing and budgeting employee compensation to align with business objectives, market trends, and regulatory requirements. It involves input from HR, finance, and business leaders to ensure fairness, competitiveness, and sustainability. Organizations with complex pay structures benefit from dedicated compensation management technology to enhance efficiency, compliance, and decision accuracy.

The ability to produce the information needed by all stakeholders: employees, managers, HR, Finance, executives, the Board of Directors, auditors, and regulators. Reports ideally should be on demand via self-service for the appropriate audiences. Analysis should show compensation effectiveness, distribution, fairness, and discrepancies. Predictive analytics can use the company's data assets to spot trends, predict future performance, and proactively reduce risk.

See Compensation cycle.

Using compensation plans, together with performance assumptions about attainment of goals that drive variable pay, to estimate compensation spending and return on investment (ROI). A compensation management system should provide the ability to run accurate simulations based on varying what-if scenarios.

A company's approach to using compensation to attract and retain talent, and drive the human performance needed to achieve company goals. Since company priorities and strategies may shift throughout the year, compensation strategy and execution should be able to adapt quickly to redirect behaviors in support of new directions.

See Pay transparency.

A compensation system that rewards based on an employee's skills and experience rather than their job title or position. Also known as skill-based and knowledge-based pay.

Limited time special events with special rewards designed to provide motivation for achieving a particular short term objective. Rewards typically can be a prize, cash bonus, or points in a point system.

See Sales crediting.

The opposite of an accelerator. Penalizes a rep for being under quota by applying a lower commission rate. See also Accelerator.

See Deferred compensation.

An incentive plan in which eligible employees are awarded a payment based on a percentage of company profits during a given period of time, usually annually. In publicly traded companies this payment is often in the form of company stock. The amount distributed to each employee may be weighted according to the employee's base salary so that employees with higher salaries receive a greater amount of the shared pool of profits.

Bonus whose payment is subject to management decision as to whether and how much to pay; not based on predetermined criteria or performance objectives.

An advance payment against future commissions. A recoverable draw will be paid back by the sales rep when the commission is actually earned. A non-recoverable draw is not expected to be paid back; this typically would be used for new sales reps who realistically are not likely to earn commissions in the short term.

The dates at which a compensation plan becomes effective and/or ceases to be in effect for a given employee.

A set of criteria that determine whether an employee is eligible for participation in a given incentive plan at a given time. It may depend on job/role, time in role, location, etc.

The gradual reduction of a workforce over time due to resignations, retirements, or other voluntary and involuntary departures not immediately replaced. It serves as a key indicator of organizational health and workforce stability. It is the counterpart to employee retention, with higher attrition typically signaling lower retention and potential challenges in engagement, compensation equity, or performance alignment. See also Employee retention.