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What Is Compensation Management Software?

Compensation management software is a specialized technology solution designed to help organizations plan, manage, and optimize employee compensation, including salaries, bonuses, incentives, and equity-based rewards. It provides a structured and automated approach to compensation planning, ensuring that pay structures align with business objectives, market trends, and regulatory requirements.

Unlike general HR suite compensation modules, which are designed primarily for the basic salary and bonus administration needs of small to medium businesses, dedicated compensation management software is built to accommodate more complex pay structures, variable compensation models, and pay equity analysis, such as needed by large and/or global enterprises. It provides HR and compensation teams with advanced tools to streamline compensation cycles, enhance pay transparency, ensure compliance, and support data-driven decision-making.

Organizations use compensation management software to reduce administrative burden, improve accuracy, and enhance employee engagement by ensuring fair and performance-driven pay structures. The software integrates with existing HR, payroll, and finance systems to provide a seamless compensation management experience.

What are the key features of compensation management software?

Compensation management software typically offers a wide range of features designed to automate and enhance compensation processes. Some of the core features generally include:

Compensation planning and budgeting

  • Enables HR teams to define salary budgets based on business objectives and financial constraints.
  • Supports scenario modeling to forecast the impact of different compensation strategies.
  • Ensures alignment between compensation plans and corporate financial goals.

Salary and pay structure management

  • Creates and manages salary bands, pay grades, and job-based compensation structures.
  • Ensures internal pay equity by providing visibility into pay scales and benchmarking data.
  • Allows for automated salary adjustments based on tenure, performance, and market trends.

Variable pay and incentive management

  • Supports bonus planning, commission structures, and sales incentives.
  • Links performance metrics to compensation outcomes, ensuring alignment with business goals.
  • Automates short-term and long-term incentive programs, such as stock options and profit-sharing.

Pay equity analysis and compliance

  • Conducts real-time pay equity audits to identify disparities and ensure fair compensation practices.
  • Provides automated compliance tracking for evolving pay transparency and labor laws.
  • Generates regulatory reports and audit trails to support compliance initiatives.

Compensation analytics and reporting

  • Offers data visualization and dashboards to track compensation trends.
  • Provides real-time insights on compensation spend, pay gaps, and workforce cost trends.
  • Supports custom report generation for boardroom-ready presentations.

Integration with HR, payroll, and finance systems

  • Syncs with HRIS, payroll software, and financial planning tools to ensure accurate data flow.
  • Eliminates manual data entry and reduces errors in salary calculations.
  • Provides a single source of truth for compensation data, enhancing decision-making.

Why do organizations need compensation management software?

Many organizations struggle with compensation management due to manual processes, lack of transparency, compliance risks, and data inaccuracy. Compensation management software addresses these challenges by:

  • Improving efficiency – Automates salary planning, incentive payouts, and pay adjustments, reducing HR workload.
  • Enhancing accuracy – Eliminates manual errors in compensation calculations.
  • Ensuring compliance – Keeps organizations aligned with global pay transparency and labor laws.
  • Supporting strategic decision-making – Provides data-driven insights for competitive compensation strategies.
  • Boosting employee trust and retention – Ensures fair and transparent pay practices, improving job satisfaction.

How does compensation management software compare to other approaches?

Organizations manage compensation using different methods, but not all approaches are equally effective. Below is a comparison of compensation management software with other common approaches:

Spreadsheets

  • Pros: Low cost, customizable, familiar interface.
  • Cons: Prone to errors, lacks automation, security risks, difficult to scale.

Best for: Small businesses with simple pay structures

HR suite compensation modules

  • Pros: Integrated with broader HR functions, offers basic automation.
  • Cons: One-size-fits-all, lacks flexibility for complex compensation structures, requires workarounds for compliance.

Best for: Organizations with simple pay structures and minimal need for customization

Dedicated compensation management software

  • Pros: Purpose-built for compensation, highly flexible, supports advanced analytics and compliance.
  • Cons: Requires investment in setup and integration.

Best for: Enterprises with complex, global, or performance-driven compensation needs

How can you evaluate compensation management software vendors?

Selecting the right compensation management software is not just about the technology—it’s also about the vendor behind the solution. A strong, reliable vendor ensures ongoing innovation, compliance updates, and customer support, which are critical for long-term success. When assessing potential vendors, organizations should consider the following factors.

Does the vendor have relevant industry expertise and a proven track record?

A vendor’s experience in the compensation management space can be a strong indicator of its ability to support complex pay structures and evolving compliance needs. Consider:

  • How long the vendor has been in the compensation management market.
  • Whether they specialize in compensation solutions or if compensation is just a small part of a broader HR offering.
  • What industries they serve and whether they have experience with organizations of similar size and complexity.
  • Whether they provide case studies or references from companies with similar compensation challenges.

Vendors that focus specifically on compensation management are more likely to provide deep expertise, robust features, and continuous innovation compared to general HR suite providers.

How committed is the vendor to innovation and product development?

Compensation management is evolving rapidly, especially with advancements in AI, analytics, and compliance automation. Software providers should invest in R&D and be committed to continuous improvement. Organizations should assess:

  • How frequently the vendor releases new features and updates.
  • Whether they invest in AI-driven analytics, automation, and pay equity tools.
  • Whether they proactively update the software to reflect changes in labor laws and compliance requirements.

Choosing a vendor that is forward-thinking and responsive to industry trends ensures that the software remains relevant and effective as compensation practices evolve.

What level of customer support and service quality can you expect?

Compensation is a high-stakes function—errors or disruptions in pay processes can have serious consequences. Reliable customer support is essential to ensure smooth implementation and ongoing operations. Organizations should evaluate:

  • The availability and responsiveness of customer support, whether 24/7, regional, or business hours only.
  • Whether they offer dedicated account managers or rely solely on ticket-based support.
  • The quality of their implementation support and training resources for HR teams.
  • Their track record in customer satisfaction based on reviews, testimonials, or third-party ratings.

A vendor with strong customer support helps organizations avoid costly downtime and ensures HR teams can maximize the software’s capabilities.

Can the solution scale globally and support complex organizational structures?

For organizations with a growing workforce or global operations, compensation software should be able to scale accordingly. Consider whether the vendor offers:

  • Multi-country and multi-currency support for global compensation structures.
  • Compliance tracking for regional pay transparency and tax laws.
  • A scalable architecture that can handle expanding workforce needs without performance .issues

Selecting a vendor with proven success in managing large-scale, complex compensation programs ensures the software will continue to meet business needs as the organization grows.

How does the vendor handle security, compliance, and data privacy?

Given that compensation data is highly sensitive, organizations must ensure the vendor adheres to industry-leading security and compliance standards. Evaluate:

  • What data encryption and access controls are in place to prevent breaches.
  • Whether the vendor complies with GDPR, SOC 2, ISO 27001, or other relevant security standards.
  • Whether the system can handle compliance reporting and audit trails for regulatory requirements.

A vendor with robust security measures and compliance certifications minimizes risk and ensures that compensation data remains protected.

Does the software integrate well with your existing HR, payroll, and finance systems?

Even the best compensation software will underperform if it doesn’t integrate well with HR, payroll, and finance systems. Organizations should assess:

  • Whether the vendor offers integration with major HRIS and payroll providers.
  • Whether the system manages all of your compensation data in one centralized location.
  • How the vendor handles data migration from existing compensation tools.

A vendor with strong integration capabilities ensures a seamless transition and smooth data flow, reducing administrative workload and improving accuracy.

What is the vendor’s reputation among customers and industry experts?

Researching the vendor’s reputation can provide valuable insights into real-world user experiences. Organizations should:

  • Check independent software review platforms such as Gartner, G2, or Capterra for customer ratings and feedback.
  • Look for success stories and testimonials from companies with similar compensation needs.
  • Assess whether the vendor has received industry awards or recognitions for innovation and customer satisfaction.

A vendor with high customer satisfaction and strong industry recognition is more likely to deliver a reliable and well-supported compensation solution.

Final thoughts on evaluating the vendor

Selecting compensation management software is a long-term investment, and the vendor's expertise, reliability, and commitment to innovation are just as important as the features of the software itself. By conducting thorough due diligence, organizations can choose a vendor that provides not only the right technology but also the support, security, and scalability needed for sustained success.

What are best practices for implementing compensation management software?

Organizations looking to implement compensation management software should follow best practices to ensure a smooth transition and maximize its benefits:

  1. Define compensation objectives – Establish clear goals for how the software will support compensation strategy and business needs.
  2. Conduct a gap analysis – Identify limitations in current compensation processes and determine key requirements for the new system.
  3. Select a solution that meets business needs – Choose software that aligns with company size, compensation complexity, and regulatory requirements.
  4. Ensure seamless integration – Connect the software with existing HR, payroll, and financial systems to ensure smooth data flow.
  5. Train HR and managers – Educate key stakeholders on using the system for compensation planning, pay adjustments, and reporting.
  6. Monitor and refine compensation strategies – Use analytics to continuously optimize pay structures and incentive plans.

Frequently asked questions (FAQs) about compensation management software

  1. What types of organizations benefit most from compensation management software?
    Large enterprises, global organizations, and companies with complex pay structures benefit most from compensation management software. Businesses that need to manage diverse compensation plans, ensure compliance with evolving pay regulations, or align pay with performance will find the software especially valuable.
  2. How does compensation management software improve pay equity compliance?
    Compensation management software includes pay equity analysis tools that automatically compare salaries across demographics, identify pay gaps, and generate compliance reports. This ensures organizations can proactively address disparities and align with global pay transparency laws.
  3. How does compensation management software integrate with other HR and payroll systems?
    Most compensation management software integrates seamlessly with HRIS, payroll software, and financial planning tools. It syncs employee data, salary structures, and compensation changes to ensure accuracy in payroll processing and financial reporting.
  4. What challenges does compensation management software solve?
    The software addresses challenges such as manual errors, lack of pay transparency, inconsistent compensation structures, compliance risks, and administrative inefficiencies. By automating compensation planning and execution, it ensures fair, accurate, and efficient compensation management.
  5. How does compensation management software support strategic decision-making?
    By providing real-time compensation analytics, benchmarking data, and scenario modeling, the software helps HR and business leaders make informed pay decisions. It allows organizations to evaluate the impact of different compensation strategies before implementation.
  6. Is compensation management software expensive?
    The cost of compensation management software varies depending on features, company size, and integration requirements. While there is an initial investment, the long-term benefits—such as improved efficiency, compliance, and workforce retention—typically outweigh the costs.
  7. Can compensation management software handle global compensation structures?
    Yes, most dedicated compensation management software solutions are designed to support multi-currency, multi-country pay structures, ensuring compliance with regional labor laws and tax regulations. The more robust the solution, the better it is at handling complexity, including local differences and exceptions.

Conclusion

Compensation management software is an essential tool for organizations looking to streamline compensation planning, enhance pay transparency, ensure compliance, and align pay structures with business goals. Unlike spreadsheets or HR suite compensation modules, dedicated compensation software provides the flexibility, automation, and analytics capabilities required for modern compensation strategies.

As businesses grow and compensation structures become more complex, adopting a purpose-built compensation management solution ensures greater efficiency, accuracy, and strategic decision-making, helping organizations attract, retain, and motivate top talent.

Explore more on this topic:

  1. 3 Benefits of Technology for Compensation Alignment
  2. Should You Be Looking at Best-of-Breed Compensation Software?
  3. A Complete Guide to Compensation Management

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A

  • Absolute commission plan

    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.

  • Accelerator

    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".

  • Accruals

    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.

  • Annual review

    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.

  • API integration

    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.

  • Approvals

    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.

  • Artificial Intelligence (AI)

    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.

  • ASC 606

    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.

  • Attainment

    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.

B

  • Base rate

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

  • Base salary

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

  • Benchmarking

    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.

  • Benefits

    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.

  • Bonus

    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.

  • Bottom-up budget

    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.

  • Budget allocations

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

  • Budget pools

    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.

C

  • Cap

    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.

  • Carried interest or carry

    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.

  • Channel management

    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.

  • Clawbacks

    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.

  • Commission earnings

    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.

  • 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.)

  • Commission plans

    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.

  • Commission statements

    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.

  • Compa-ratio

    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.

  • Compensation

    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.

  • Compensation budgeting

    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.

  • Compensation cycle

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

  • Compensation cycle planning

    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.

  • Compensation forecasting

    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.

  • Compensation management

    The strategic process of designing, administering, and optimizing employee pay structures to align with organizational goals, market conditions, and regulatory requirements. Effective compensation management ensures fairness, transparency, and motivation while minimizing compliance risks. Best practice involves leveraging dedicated compensation management technology to enhance accuracy, efficiency, and data-driven decision-making.
    Read more
  • Compensation philosophy

    A company’s guiding belief system about how it pays employees. It outlines the rationale behind pay decisions—such as whether to lead or match the market, how to balance internal equity with external competitiveness, and the role of performance in determining pay. It provides the “why” behind compensation practices, while the compensation strategy defines the “how.” See also Compensation strategy.

  • Compensation plan

    A structured framework outlining an organization’s approach to employee pay, including base salary, bonuses, incentives, and benefits. A well-designed compensation plan ensures internal equity, market competitiveness, and compliance. Managing complex compensation plans effectively often requires dedicated compensation technology to ensure accuracy, transparency, and alignment with business strategy.
    Read more
  • Compensation planning

    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.

  • Compensation reporting & analysis

    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.

  • Compensation round

    See Compensation cycle.

  • Compensation simulation

    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.

  • Compensation strategy

    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 also Compensation philosophy.

  • Compensation transparency

    See Pay transparency.

  • Competency-based pay

    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.

  • Contests

    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.

  • Crediting

    See Sales crediting.

  • CSRD (Corporate Sustainability Reporting Directive)

    An EU regulation that requires large companies to disclose detailed ESG data—including workforce-related metrics such as pay equity. As outlined in beqom’s overview of CSRD and pay equity, the directive raises the bar for transparency, pushing organizations to track and report on fair compensation practices as part of their sustainability efforts.

D

  • Decelerator

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

  • Deferred compensation

    Compensation, whether cash or equity, that is earned and accrued in the present but paid at a later date, such as a deferred bonus, deferred profit sharing, or stock plan. The future payment must be accrued for.
    Read more
  • Deferred pay

    See Deferred compensation.

  • Deferred Profit-Sharing Plan (DPSP)

    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.

  • Discretionary bonus

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

  • Draw (recoverable and non-recoverable)

    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.

E

F

  • Fixed commission

    See Flat rate commission.

  • Flat commission

    Commission is a fixed amount per unit. See also Flat rate commission.

  • Flat rate commission

    Commission rate is a fixed percentage of sales that does not vary based on volume (as with an accelerator). Also known as a Fixed commission.

  • Flexibility in a framework

    A term coined by beqom to refer to the need to provide a consistent structure for compensation across a company, especially a global company, but to allow for local flexibility to adapt to local market needs.

  • Focal point review

    A performance review which is performed at the same time for everyone in the company, and may be tied to a pay increase. See also Annual Review.

  • Forecasts

    Projections of future financial performance. In terms of compensation the forecast will depend on headcount plans, compensation plan designs, and performance against the metrics to which compensation is tied.

G

H

  • Hazard pay

    Additional pay for work that is dangerous or imposes physical hardship which is not adequately alleviated by protective devices.

  • Hierarchies

    Organizational structures in which subordinate entities roll up to higher level entities. An organization can have multiple hierarchies used for different processes. For example, one hierarchy might define management reporting relationships used for performance and merit reviews. A different hierarchy might be used for tax reporting. Another hierarchy might reflect a project based structure that has special incentives tied to it. Another might be a matrixed compensation hierarchy, reflecting the fact that some pay decisions for an employee require multiple inputs. One employee can hold different positions in multiple different hierarchies.

  • High performance culture

    An organizational environment where individuals and teams consistently meet or exceed expectations through accountability, continuous improvement, and alignment with strategic goals. It is often reinforced by transparent performance management and equitable compensation practices, which together help motivate employees, recognize contributions fairly, and sustain long-term organizational effectiveness.

  • High performance culture

    An organizational environment where individuals and teams consistently meet or exceed expectations through accountability, continuous improvement, and alignment with strategic goals. It is often reinforced by transparent performance management and equitable compensation practices, which together help motivate employees, recognize contributions fairly, and sustain long-term organizational effectiveness.
    Read more
  • High performers

    Individuals who consistently exceed performance expectations, deliver strong results, and demonstrate behaviors aligned with organizational goals. They are often identified through performance management systems and may be prioritized in compensation planning, development opportunities, and succession pipelines due to their outsized impact on business outcomes.

  • HR analytics

    The ability to analyze employee data, such as demographics and compensation, to gain insights that can lead to improved retention, engagement, motivation, performance, and compliance. Dedicated compensation software often includes advanced analytics that can help keep costs in line with revenue, while maintaining a pay equity philosophy.

  • HR process improvement

    The systematic analysis and optimization of human resources workflows to increase efficiency, accuracy, and strategic alignment. It often involves streamlining tasks such as performance evaluations, compensation reviews, or pay equity audits through technology, data integration, and policy refinement to better support organizational goals and workforce needs.

  • HR suites

    Suites of software to manage common Human Resources tasks. See Human Capital Management (HCM) Software and Talent Management (TM) Software. HR suites may contain a compensation module, but these are generally not sufficient for managing large enterprise compensation.

  • HR technology

    The digital tools and platforms used to manage human resources functions, from recruitment and performance to compensation and compliance. It enables data-driven decision-making, operational efficiency, and improved employee experience. Specialized solutions, such as compensation and pay equity software, support fair and transparent workforce practices across increasingly complex organizational environments.

  • HR transformation

    The strategic rethinking and restructuring of human resources functions to align more closely with organizational goals and evolving workforce needs. It often involves modernizing processes, systems, and structures—such as performance management or compensation frameworks—and may include adopting technologies that support data-driven decision-making and pay equity.

  • HR Transformation

    The strategic rethinking and restructuring of human resources functions to align more closely with organizational goals and evolving workforce needs. It often involves modernizing processes, systems, and structures—such as performance management or compensation frameworks—and may include adopting technologies that support data-driven decision-making and pay equity.
    Read more
  • Human Capital Management (HCM) Software

    HCM software generally covers a broad range of HR tasks like recruiting, hiring, learning management, planning & administration, payroll, performance reviews, employee self-service, scheduling, absence management, analytics, and dispute management. While they may have a compensation module, they generally are not designed to handle complex enterprise compensation.

  • Hurdle

    See Threshold.

I

  • IFRS 15

    See ASC 606.

  • Incentive compensation management (ICM)

    The process of managing sales incentive compensation, including planning and modeling of plans, integrating the needed data sources, managing data, crediting of transactions, calculation of incentive payments, review and approval process, communication, dispute management, reporting and analysis.

  • Incentive Stock Option Plan (ISOP)

    A type of employee stock option that can be granted only to employees, with potential US tax benefits. Typically shares are offered to employees at a discounted price. ISOPs encourage employees to remain with a company and contribute to its growth in value and share price. See also ESOP - Employee Stock Option Plan.

  • Individual compensation planning

    Tailoring total rewards to meet the needs of individual employees. With a diverse and sometimes distributed workforce consisting of different generations of workers, individual compensation planning can help to engage and energize workers, and inspire loyalty. While in the past this would have been too burdensome to HR, now software can provide the analysis and intelligence needed to automate this task and suggest individualized rewards options. See also Personalized rewards.

  • Integrated compensation management system

    Compensation management that is integrated with other HR systems such as the central employee database, performance management, learning management, etc., such that the other systems can feed information that is relevant to the calculation of compensation.

  • Internal equity

    The fairness and consistency of compensation within an organization, ensuring that employees performing comparable work receive comparable pay, considering factors such as role, experience, and performance. It is a foundational principle in compensation management and a critical factor in maintaining workforce trust, engagement, and legal compliance.

J

  • Job grade

    A grouping or level that encompasses positions with the same or similar levels of responsibiity, impact, and authority, reflective of factors such as the knowledge, skills, and experience required by the jobs in that grade.

K

  • Key Performance Indicators (KPI)

    Quantifiable measures that demonstrate how effectively a company is achieving important business objectives. KPI achievement is based on attaining a certain KPI value by a certain date. KPIs are often used within calculations of variable compensation, such as bonus plans that may have components based on level of achievement of one or more KPIs, for example sales targets, customer satisfaction ratings, production goals, margin goals, etc.

  • Kicker

    See Accelerator.

  • Knowledge-based pay

    See Competency-based pay.

L

  • Long-term incentive (LTI)

    Incentive compensation that is earned and awarded now but delivers value later, such as deferred bonuses or stock options. Long-term incentive plans (LTIP) are used to encourage key employees to stay with the company.

  • Long-term incentive plan (LTIP)

    A compensation mechanism designed to reward employees, typically executives, for achieving sustained performance over an extended period. LTIPs often include equity-based awards or cash bonuses tied to long-term goals. Effective management of LTIPs requires transparency and consistency to ensure alignment with organizational strategy and support for equitable compensation outcomes.

  • Lump sum payment

    A payment to an employee, such as a bonus, that is paid all at once.

M

  • Machine Learning (ML)

    A data processing technology that uses algorithms to sift through massive amounts of data and find trends and patterns. For example, an ML process can look at data like employee demographics, roles, levels, job functions, fixed and variable pay, and market benchmark data, to find employees that are flight risks, and determine appropriate compensation remedies that may keep them on board. ML can also identify peers based on their role, geography, and other relevant attributes, and identify whether there are any pay inequities, then further determine whether those inequities could be the result of biases. (See also Artificial Intelligence.)

  • Malus

    The process of reducing or cancelling deferred incentive awards that have not yet vested. It is a requirement for many Financial Services companies by the UK and European banking regulations on compensation. Malus is intended to help to prevent misbehavior and excessive risk taking by punishing employees. It also helps align compensation to performance; malus may be applied to reduce compensation if an organization's performance has been below expectations.

  • Management by Objective (MBO)

    Basing variable compensation upon completion of clearly defined objectives. Objectives must be carefully structured to ensure that achievement of the incentivized behavior will lead to the desired organizational performance.

  • Merit increase

    An increase in wages based on the employee's assessed job performance or other measure of value. See also Promotion increase.

  • Merit matrix

    A grid used to provide guidance to managers in determining merit increases based on employee performance, sometimes also linked to the employee's position within a pay range for the role.

  • Metrics

    Clearly defined and quantifiable measures used to track and assess a given business process. Examples might include gross sales, gross margin, unit production, absentee rate, lead conversion, customer retention ratio, problem resolution time, returns, cost of sales, etc.

  • Modeling

    Creating variants of compensation plans so that they can be tested, analyzed, and approved. Ideally a model is based on real employee data and embodies the real world complexity of your compensation structures and calculations. Loading real performance data (historical or forecast) can help you see how the model performs in terms of total compensation cost, distribution, fairness, and ROI.

N

  • Non-discretionary pay

    Compensation that is contractually obligated or automatically given, such as hourly wages, overtime pay, or bonuses that are tied to measurable performance criteria.

O

  • Off-cycle plan management

    Compensation events that happen outside of regular compensation cycles. These can include promotions, retention actions, special performance recognitions, etc. They may require separate workflows and approval hierarchies.

  • OKR (Objectives & Key Results)

    A strategic framework used to set and track measurable goals within organizations. OKRs align individual and team efforts with broader company objectives, often informing performance assessments. In compensation contexts, they can support equitable, performance-based reward structures by linking outcomes to measurable impact rather than subjective evaluation.

  • On-Target Commissions (OTC)

    Commission earned if performance is at 100% of target or quota.

  • On-Target Earnings (OTE)

    Total fixed plus variable compensation an employee will receive if he/she achieves 100% of all variable compensation targets (bonuses and commissions).

  • Organizational effectiveness

    The degree to which an organization achieves its goals through efficient structures, aligned strategies, and a high-performing workforce. It encompasses how well systems such as performance management, compensation planning, and equity practices contribute to sustainable outcomes, employee engagement, and the organization’s overall ability to adapt and compete.

  • Override

    Commission on sales applicable to other parties besides the sales reps, such as sales managers or product managers, based on a percentage of the sales or commissions of the sales reps, as determined by the sales crediting plan. See also Roll-up.

P

Q

  • Quota

    A number that a sales rep is expected to achieve, typically expressed as revenue, but quotas also can be tied to sales volume or metrics/activities (net new customers, customer retention, etc.), or some combination of these factors. Commission rates may be tied to attainment of quotas, as with a tiered commission that pays a lower rate for sales below quota, and a higher rate for sales that exceed the quota.

  • Quota management

    The process of setting, tracking, and adjusting sales quotas or targets. Quota setting can be done through a top-down or bottom-up process, or a hybrid of the two.

R

  • Recurring revenue

    Revenue that is contracted to be paid over time, such as subscription or maintenance revenue.

  • Regularization of bonus

    See True-up.

  • Relative commission plan

    Commission plan based on a predetermined quota or target.

  • Restricted Stock Units (RSUs)

    Shares of company stock that vest over time or upon meeting performance criteria. These are common for executive compensation packages and are effective for retaining top talent. RSUs offer several advantages, such as delaying share dilution, aligning employee and shareholder interests, and promoting pay equity. While this form of equity compensation can be advantageous, it’s not suitable for all organizations. Before implementing RSUs, companies should thoroughly understand their advantages, drawbacks, and tax implications so the process can be properly executed and aligned with organizational goals.

  • Retro pay

    See Retroactive pay.

  • Retroactive adjustments

    Adjustments up or down to incentive earnings after initial payment was made. Can be necessitated by restated sales figures, returns, cancellations, clawbacks, etc. Requires careful tracking of transactions, earnings, payments by the compensation system.

  • Retroactive pay

    Compensation issued to an employee to correct underpayment from a prior pay period, typically due to delayed raises, miscalculations, or adjustments in pay rates. Effective compensation management systems help ensure retro pay is calculated accurately and transparently, maintaining compliance and supporting trust in payroll practices. See also Retroactive adjustments and Clawbacks.
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  • Revenue recognition

    The process of booking revenue according to financial accounting standards, such that revenue is recognized as the product or service is actually provided, regardless of when payment is received. See also the related regulations, ASC 606 / IFRS 15.

  • Rewards

    Any form of value provided to employees as a result of their employment, such as salary, bonus, stock, benefits, perquisites, gifts, prizes, and various forms of recognition.

  • Rewards cycle

    Period for which a given reward is calculated and processed, typically annually for salaries, monthly for commissions, quarterly or half-yearly or annually for short or long term incentives. A company may have multiple and overlapping rewards cycles.

  • Risk adjustment

    An adjustment to variable compensation to account for currently known risks or adverse performance outcomes. The known risk of the transaction that triggered the reward can be factored into the reward at time of payment. Ex-post risk adjustment refers to adjustments made to compensation after an adverse performance outcome, which may be the result of risks that have materialized (crystalized risk) or of misconduct. Ex-post risk adjustments include reducing current year awards, the application of malus, and clawbacks.

  • Role-based allowance

    A designated amount of pay applicable to designated roles, in cash or shares, over and above salary, which does not count towards pension and benefits expenses, and which may or may not be deferred over a vesting period. The European Banking Authority (EBA) ruled in 2015 that role-based allowances count as bonuses and therefore are subject to a cap. The term also can be used to refer to an allowance paid to an employee based on additional special responsibilities required to be undertaken as part of their position.

  • Roll-up

    In relation to sales commissions, a roll-up is a commission on sales applicable to parties above the sales rep in the sales reporting hierarchy, such as the sales manager or district manager, based on a percentage of the sales or commissions of the sales reps. Roll-down or roll-over is also possible, for example if sales by a sales manager results in commission payment to the subordinate sales team members. See also Override.

  • RSU

    See Restricted Stock Units.

S

  • Salary band

    The range of salaries, minimum to maximum, for a job grade. Typically influenced by factors such as job requirements, education, experience, geography, and job market conditions,

  • Salary compression

    See Wage compression.

  • Salary management

    The process of planning salaries and salary increases, which may involve job analysis, market research and benchmarking, developing job grades and salary bands, calibration, creating a budget, and managing the salary review and merit increase process.

  • Salary review

    The process by which an individual employee's pay is set for the forthcoming period. Typically done annually and referred to as the Annual Salary Review (ASR), the salary review is generally conducted by an employee's manager, taking into account the employee's past performance, role and goals going forward, and budgetary guidelines.

  • Sales crediting

    Assigning credit for a sale, and thereby the related commission, to the appropriate member or members of the sales team, according to a predefined set of business rules. Crediting can be as simple as assigning the full sale value to one rep, or can be more complex if split amongst multiple reps, or if there are team components applied based on territory or market segment. Crediting is the first crucial step in the sales incentive calculation process.

  • Sales incentives

    Any type of direct or indirect reward related to sales.

  • Sales objectives management

    The process of setting, tracking, assessing, and incentivizing sales objectives, beyond commissioning for sales. Objectives may include things like cross-selling, up-selling, customer retention, customer satisfaction, net new customers, product mix, new product sales, etc.

  • Sales performance management

    The process of managing sales performance, including planning and modeling of incentive plans, managing territories and quotas, integrating the needed data sources, processing sales data, crediting transactions, calculating incentive payments, reviewing and approving payments, communication, dispute management, reporting and analysis.

  • Scenarios

    Models that allow compensation administrators to alter variables in compensation plans or performance assumptions to see the result, as a way of testing and determining the optimum compensation plan. Sometimes called "What-ifs."

  • Sell to cover

    The selling of some shares of stock from a stock incentive award to cover tax liability for the employee.

  • Share Incentive Plan (SIP)

    A tax-advantaged employee share plan in which shares are held in trust on behalf of employees. All employees must be eligible to participate in the plan provided that certain criteria are met. May include free shares, partnership shares (paid for by employees out of pre-tax salary), matching shares (given by the company to employees who purchase partnership shares) and dividend shares (purchased with dividends from other plan shares). Was formerly known as the all-employee share ownership plan (AESOP).

  • Short term incentives

    Variable incentive payments that are paid when earned (as opposed to long term or deferred incentives).

  • Skill-based pay

    See Competency-based pay.

  • Sliding scales

    Commissions paid at different percentages for different volumes of total sales within a given time period. Can be based on units or value. For example, the commission rate is 10% of total sales up to $100,000 in sales, but 15% of total sales if sales exceed $100,000, and 18% of total sales if sales exceed $200,000. The scale can slide up or down; for example, an investment firm might pay lower percentage commissions on higher volumes because clients are charged lower commission rates for high volumes.

  • SPIF (Sales Performance Incentive Fund)

    A specially funded incentive program, usually temporary, to drive certain behaviors at certain times. Can take any form, such as cash bonus, contest prize, etc.

  • Split

    Sharing of sales credit and commission amongst two or more payees. The sales crediting process will split the credit and commission according to pre-defined business rules.

  • Stock option plan

    Reward plan that gives employees the right to buy their company’s stock at a set price after a certain period of time.

  • Straight line commission

    Commission plan that rewards a rep directly correlated to the percentage of quota reached. For example, if the rep attains 80% of quote, the payout is 80% of the full on-target commission amount. If the rep attains 125% of the quota, the payout is 125% of the OTC.

T

  • Talent Management (TM)

    TM software generally covers HR tasks related to acquiring, developing, and retaining talent, like workforce planning, talent acquisition & onboarding, performance appraisals, goal management, learning management, competency management, career development, and succession management. While many have a compensation module as well, they generally are not designed to handle complex enterprise compensation.

  • Territory management

    The process of designing and allocating sales territories amongst the sales team. Territories can be defined in terms of geography, industry vertical, product line, client size, client priority, etc. Well designed territories are necessary to provide proper sales coverage and motivating opportunity to sales reps. Automated territory management can allow for territory readjustment and optimization throughout the year.

  • Territory volume commission plan

    Commission is based on total sales within a territory during a given time period and is split amongst the reps that serve the territory, according to predefined business rules.

  • Threshold

    A minimum performance level that must be achieved in order to earn an incentive payment. Also known as a hurdle.

  • Tiered commissions

    Commissions paid at different percentages for different volumes of sales. Can be based on units or value. For example, the commission rate is 10% on units up to 1000 units, 15% on units from 1001 to 5000 units, and 20% for units exceeding 5000 units. Thus a rep who sells 6500 units would be paid 10%*1000 + 15%*4000 + 20%*1500.

  • Top-down budget

    A compensation budget that starts with a target total compensation spending number for the company, which is then allocated to departments, and then further allocated downstream within each department, to team and individual levels. Allocations typically take into consideration prior year compensation numbers, headcount projections, current goals and priorities, and performance expectations.

  • Total cash compensation (TCC)

    Total of all cash based compensation, fixed and variable, including salary, bonus, commission.

  • Total compensation package (TCP)

    Total value of all cash based compensation, long-term incentives, and benefits. (TDC + benefits)

  • Total direct compensation (TDC)

    Total of all cash compensation plus long-term incentive compensation (TCC + LTI).

  • Total guaranteed compensation (TGC)

    All components of the pay package that are guaranteed, including salary and benefits. Excludes variable compensation.

  • Total rewards

    All of the compensation, benefits, perks, recognition, and other value received by an employee. This should include sales incentive compensation, even when sales incentives are managed separately from other rewards. A compensation system should be able to generate total rewards statements that show the employee the full range and value of all rewards they are receiving.

  • Total rewards statement

    A report, usually monthly, showing an employee the full range of rewards earned and paid, monthly and YTD, preferably including or linked to information showing exactly how the rewards were derived, including any related performance metrics and calculations. In a dedicated compensation platform, these are generated automatically and available on demand.

  • Total rewards strategy

    Approach used by a company to utilize various forms of rewards to attract, retain, motivate, and align employees, with the end goal of fulfilling the mission and objectives of the organization.

  • True-up

    Adjustment or "regularization" of a bonus typically performed at year end to even out quarterly performance. If an employee missed some quarterly goals and therefore missed some quarterly bonus, but by year end has met the annual goal, an adjustment can be made at year end. For example, if the annual target was 100, with 25 each quarter, and the employee attained 15 each in Q1 & Q2 (missed goal) but then attained 30 in Q3 and 40 in Q4, the attainment was 100 for the year, meeting the annual target. An adjustment can be made to reward the annual performance, especially if the quarterly payments do not reward partial achievement and/or are capped and don't reward over achievement.

U

  • Unconscious bias

    Implicit attitudes or stereotypes that influence decisions, including pay and promotion, without conscious awareness. Can be avoided through tools that support data-driven decision making.

V

  • Variable compensation

    Compensation that is dependent upon results such as attainment of goals or targets. Bonus plans and Short Term Incentives fall into this category.

  • Vesting schedules

    Timing of when certain forms of deferred compensation become fully owned and accessible by the employee, such as stock options or deferred cash compensation. Vesting schedules give employees incentive to stay with the firm, as non-vested assets are generally forfeited if the employee leaves the company. Typical vesting periods are 3 to 5 years, during which the asset gradually becomes vested.

W

X

  • X-factor pay

    A colloquial term for additional compensation given for unique skills, rare expertise, or business-critical capabilities.

Y

  • Year-end compensation review

    The formal process conducted at the end of an annual performance cycle to assess employee pay, performance, and equity adjustments.

Z

  • Zero-based budgeting

    Method of creating a budget where each time you start from a zero base, rather than using the previous period's budget as a baseline and modifying. Even existing and recurring expenses have to be justified newly each time rather than automatically continuing or being increased. This approach is generally more time consuming and may have other shortcomings but is thought to be a method of keeping expenses lower.