We all call it ‘management’, but the exact meaning seems to be in the eye of the beholder (or actually the mouth of the speaker). Let’s assume for argument’s sake that it means making it all work well (what a concept!). So the quick and dirty definition for compensation management would be making sure the right people get the right pay for achieving the right objectives in the right way. But how?
There are typically two basic ways to accomplish any management task, top-down, or bottom-up. For top-down compensation the process usually goes something like:
- Senior management provides a total budget (often an average planned pay increase) – this is assumed to take into account any number of pertinent variables such as cost of living, market adjustments, geographic differences, etc.
- At some intermediate level the exact percentage that each manager (or unit) is determined
- Line managers using a predetermined process allocate the pot of money based primarily on performance assessments.
In contrast, the bottom-up approach entails:
- Communicating policy, context and constraints to managers
- Assembling the forecasts and proposals
- Analyze and align with management expectations
- Revise and obtain final approvals
- Allocation and tracking by line management.
In either case the plan must be flexible enough to accommodate deviations, unforeseen changes in situation and performance improvements (or degradation). The ideal scenario allows elements of both methods to be applied in the most effective and efficient manner. In either case, the planning aspects generally fall to the HR function, and the execution including communication generally falls to line management.
Good management begins with good communication. Effective communication relies on the essential soundness of the underlying model or philosophy. This implies the policy is both fair and competitive. Providing the right combination of internal equity and external competitiveness is key to getting the management right. You can’t implement what you cannot defend. Because only if the policy is aligned and supportive of company goals can real equity and fairness exist.
So how does your firm ensure that their compensation management is manageable?