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Guide to Total Compensation. All you need to know about the process and how IT fits in.

Bartłomiej Podolski
Bartłomiej Podolski
Guide to Total Compensation. All you need to know about the process and how IT fits in.

There are multiple ways in which people can be compensated for their work. These ways - let's call them the comp elements - can be efficiently divided into two generic groups: fixed pay and variable pay. The fixed pay - as semantics suggests - groups all the compensation elements that are fixed, that is these elements that will be paid regardless of the performance or any other factors.

Variable pay on the other hand is more exciting. It combines all the elements that are not payable "automatically" but are rather subject to conditions that may or may not be fulfilled. Discretionary payments are a special case of variable pay in which the decision of whether the case was fulfilled or not is entirely subjective. Other variable compensation elements rely on typically objective conditions that can be achieved by employees and are payable according to the upfront agreed terms.

The common fixed pay compensation element is base salary and allowances.

The most common variable pay elements are bonuses, commissions, long-term incentives, deferred bonuses, and lump sums.

Fixed pay and variable pay are typically the two main branches of the comp tree. All the other branches roll up to one of these two.

The notion of the comp tree helps to understand how the comp elements relate one to another, especially how they roll-up and from the Total Compensation. Implementing the Comp Tree in Comp & Ben systems allows calculating the subtotals per individuals easily, provides an easy understanding of the earnings, and allows proper reporting. It is especially helpful in creating the Total Remuneration Statements (TRS).

The Comp Tree overarches all the compensation elements and processes and it is good to understand it and have it in place in the Comp & Ben IT system.

Comp Round

Compensation Round (or Comp Round for short) is another useful term often used within the area of Total Compensation / Total Reward. Typically the compensation reviews happen periodically, most often every year, although they might happen more frequently. Comp Round then equals the period in which the review cycle takes place. The notion of Comp Round allows the IT systems to differentiate the values of parameters used in the review cycle, set the new levels and administer the cycles properly. For example 2022 comp round can utilize a budget of x% while the 2023 comp round may utilize a budget of (x% + 1 percent point). All this can be typically set up by the Comp & Ben administrators in preparation for the Compensation Round.

What is the Total Compensation Review process?

It is a common practice for organizations of all sizes to review the level of compensation of their employees. Typically the aim of the process is to take a look at the employee's performance and achievements in the last year, combine that with expectations about the future (also comparing to the market), and then set the new compensation level individually. In large organizations, it is commonly driven by the Compensation & Benefits department in collaboration with the managers, HR, and executives.

In our practice, we often implement Compensation & Benefits processes that aim to review the compensation of employees and set the new compensation levels for the upcoming compensation round.

The compensation elements that need the review can be categorized in a few areas:

  • Base Salary Review
  • Bonus Level Review / Deferred Bonus Review
  • Long Term Incentives
  • Promotions and Compensation Related to promotions,
  • Special Achievements Awards / One Time Recognitions
  • Other Comp Elements Review

Traditionally the Compensation Review is a yearly process for most companies, although it might happen more frequently if the market situation requires so.

The compensation elements that are reviewed during the process vary from organization to organization. The rule of thumb is that, the larger the organization, the more compensation elements that need to be reviewed.

Typically, the process is connected with the performance review (which we sometimes implement, other times we just use the existing outcome of another process), budgeting, matching data to the market & benchmarking, quartiles calculations, merit matrix, recommendations, managerial input, and administrative effort required to set-up and execute the process properly.

The most popular is naturally the base salary review process. However, it is often accompanied by promotions, bonus levels, and LTI level reviews. The combination of the review elements varies per organization, their policies, maturity, and decisions taken.

In larger organizations, especially those regulated, it is common to defer part of the variable compensation. In that case, it is a common practice to build a deferral matrix that gathers deferral rules and the Comp & Ben software splits the compensation into bonus and deferred bonus accordingly. These outcomes are then an entry point to Deferred Compensation & LTI processes, which we will focus on another occasion. The cherry on the cake is the Total Remuneration Statement (TRS) which is often a holy grail of the Compensation & Benefits department. Without the proper C&B software it is extremely laborious and difficult to put together and distribute the Total Remuneration Statements without the fear of making a serious mistake.

Having set the stage, in this article, I would like to share our experience related to the Total Compensation Review process (sometimes also called a Total Remuneration Review process).
I will aim to describe an ideal case, although the practice is that each company handles these things in a different way, and not always all the elements are present. Also, sometimes there are special elements that don’t seem to be a standard Comp & Ben practice, and we need to add them separately to the process. An example of such exceptions could be a usage of Swarm or Tribe hierarchies, Matrix Organizations (although it seems a fairly popular practice), or preparation of the systems for HRBPs sessions held with selected populations only.

Salary Review Process

According to World at Work analysis, the typical budget for the Salary Review in 2021 and 2022 will be around 3 % for mature economies and more than 5% for developing countries. See example top-level results from the Work at Work analysis below:

World at Work salary increase budgets survey for years 2021/2022 Figure 1 - World at Work salary increase budgets survey for years 2021/2022

This suggests that we are talking about large amounts of money that will be distributed to the employees in the coming years - just for the planned base salary increases.

How does the typical salary review process look like?

Let's take a look at the process from the perspective of the people involved

Salary Review Process from Managers' Perspective

It is not a surprise, that the managers might often perceive the compensation review process as a necessary evil. They are often focused on operational work and find the yearly processes to be distractive.

As this Harvard Business Review article suggests, only a minority of the managers have enough purposefulness and willpower to switch off from the daily operations and turmoil and reflect on the more strategic topics. Therefore it seems that the IT system used for the reviews should foster strategic and long-perspective thinking. It should allow the managers to reflect on their team, the goals that the team has to achieve, and whether the current compensation serves that purpose. Additionally, we believe that the proper technology should empower the managers to make the decisions and plan their team compensation, at the same time guiding them through the ideas, rules, and policies pre-set by the Compensation and Benefits department.

From this perspective, an IT system that offers guidance, market benchmarking, compensation history, and easy-to-understand reports will be more desirable than just a plain form where one is supposed to enter numbers. Such a system can therefore be a good basis for collaboration between HR and the managers and executives. We have seen exactly this happened at one of the top automotive companies in Germany where I had an honor and pleasure to implement such a system together with a dedicated team. That company used the platform as a basis for discussion between the HRBPs and managers about their teams, ambitions, and strategy.

From managers’ perspective, what the IT system does, is that it allows them to seamlessly log in (this is important, a system with logins and passwords discourages people from using it) and typically:

  • check current and historical compensation,
  • reflect on the current situation (benchmarking, budgets, inflation, performance),
  • fill in the new comp level for subordinates (typically according to the pre-set system guidelines),
  • check if the comp levels are within the budget and if there are no warnings and errors,
  • submit for approval,
  • receive a total remuneration statement or another form of official confirmation of the decisions taken - so that it can be a basis for the discussion with the employee.

Salary Review Process from the Comp & Ben Department perspective

Only the Comp & Ben people (and us:) ) know how much effort it takes from the HR / Administrators’ perspective to prepare the salary review process.

The preparations are typically complex and take a considerable amount of time, energy, and thinking.

Comp & Ben activities before the Comp Round

The below list summarizes steps typically taken from the Comp & Ben side before the process begins:

  • define and check if the hierarchy is right (so that the correct people review the right people),
  • define populations of employees (exclusions from the processes, who is subject to what and when),
  • calculate budgets,
  • set up the budget guidelines, warnings, and limits,
  • calculate the quartiles per person (according to a job family, grades, positions, roles, or titles),
  • set up merit matrix,
  • check increase recommendation ranges,
  • check the increase fields (mandatory or legal increases, merit, promotions, lump sums),
  • assign new grade/level and titles in case of promotions,
  • set up approval workflows,
  • check the profiles and security access rights,
  • prepare the communication plan,
  • set up other parameters and values,
  • do a dry run, remove any inconsistencies and obstacles.

Comp & Ben activities during the Comp Round

The responsibilities of Comp & Ben are even higher when the process is about to start. The typical actions include:

  • kicking off the process,
  • executing the communication,
  • overseeing the progress:
    • checking the % of reviews done dashboards,
    • checking the budget consumption,
    • reacting to warnings, requests, and exceptions,
    • making final approvals,
  • preparing payroll and HCM feeds,
  • preparing and deliver remuneration statements,
  • reporting the outcomes to the executives.

The below visualization shows an example of a screen that would cover just some of the needs described above.

5be6d90f6b1fd876dd05f364af689fd1_Perf_Rating.png Figure 2 - typical salary review screen for managers

The screen aims to be self-explanatory. It covers the basic needs of the historical information, benchmarking, budget consumption, and projected compensation increase levels. It could naturally come in many shapes and forms.

If you are still stuck with old in-house systems, doing the reviews in spreadsheets or via emails, perhaps it is a good time to get a free consultation with us. We could then see together how we can make the process better.