Can compensation be done by other capable departments? Sure, but it shouldn’t be?

How people are paid is always a top priority for companies, especially with recent events — a presidential election and new pay transparency legislation to name only a couple — but some companies are still reluctant to invest in a dedicated Compensation team. This is due, at least in part, to the view of compensation expertise as a “nice to have” rather than a “must have.” This view is bolstered by the assumption that a Compensation team is redundant and something that can done by other departments, usually Finance or Accounting. Here's a Mercer Consultant's perspective on the importance of building a strong Compensation team instead of relying on other departments to fill in the gaps.

What compensation isn’t: Finance

It is unsurprising that compensation programs are usually designed and administered by one of two groups or departments: Finance or Compensation. If there is not a Compensation team, then it is almost always administered by those in Finance. The reason for this is fairly simple: the administration and design of compensation involves money and calculation. Finance is a group within an organization that is good with both. But that is where the similarity ends.

Finance, generally speaking, is about understanding financial records and creating a plan and recommendations for future spending. In short, it deals with finish-line monies and aggregated dollars to determine financial health. Compensation, on the other hand, deals with livelihood monies, or the investments and costs related to the employee population. These are costs that are likely to have the largest impact on the finish-line monies because the greatest cost for most companies is their workforce. This isn’t to say that Finance doesn’t consider the needs of or impacts on employees. Rather, Compensation is closer to those needs and making it better suited to design and administer the structures and programs that govern them. Compensation professionals are in the rewards space, which is in the HR space — both are areas that are closer to considerations regarding individual employees. Finance’s proximity to these resources is more distant, often considering aggregated cost or forecasted cost with less attention to specific talent needs or impacts.

Mercer’s internal research indicates that there is a 30:1 ratio of the general employee population to those employees who specialize in Finance. For HR, the ratio is 90:1¹. This means that the ratio of employees to Compensation professionals is likely in the thousands, but that assumes the company has anyone dedicated to the Compensation function at all.

According to Payscale’s most recent Compensation Best Practices Report, there seems to be a trend in the right direction. “A majority of organizations (59%) say they have at least one compensation professional in-house,” which is up from 44% reported a couple of years ago. Companies are increasingly recognizing the importance of the Compensation function. The report continues: “Organizations that have multiple people dedicated to compensation are more likely to be top performing organizations. Compensation expertise, whether in-house or outsourced to a consultant...allows organizations to create strategies to manage fair pay for employees and maximize payroll budgets, which can have a sizable impact on business performance and efficiency.” 

Finance teams vs. Compensation teams: the difference in action

A common example that displays the difference between the two approaches of Finance and Compensation is with bonus plans. When a plan is designed and/or administered by Finance, the bonus plan is typically focused on the company’s financial success. There are two issues that usually come up. The first is the line-of-sight while the second is metric dilution.

Line-of-sight refers to how much influence the employees have over the results of the actual metric being measured. Metric dilution refers to the overburdening of a plan with far too many metrics — an oftentimes unintentional tactic to make up for weaker management. Overly specific compensation plans with more than the best practice number of metrics might allow the company to track more accurately the specific success or failure of certain products or areas, but it can discourage those employees it is intended to motivate. This is not to say that all plans must remain relatively simple; but rather that the intention behind the design of the plan should be first and foremost the incentivizing of the employee. Both of these are avoidable if the plans are tied closely enough to the correct employee populations — a regular and ongoing task for compensation professionals, along with the determination of the incentive plans administrative feasibility.

What Compensation is: A signal and risk hedge

One of the quickest and most definitive ways of signaling to current and future talent that you are serious about the long-term health and success of the company and its employees is to have a well-supported and active Compensation team that has a living compensation philosophy in place and adheres to it. This sends the message that your company cares about getting pay correct for both the company and the employee.

When an event that affects pay occurs are you prepared to respond or do you already have your response ready? Having an articulated pay strategy and execution model that can be easilyadjusted if something unexpected or fast-moving happens like an acquisition or shifting economic conditions can be a huge advantage. It can also help even if something expected happens, like the ongoing legislative and generational pressure for pay transparency. By already having a team and strategy in place, when the unexpected (or expected) changes occur your organization can make adjustments in a consistent manner that will not exacerbate the issue later.

So, yes, you need a dedicated Compensation team — one that is supported by the appropriate investment from the company. This is important because current compensation strategies tend to reward those who switch organizations, as companies, especially in a tighter labor market, are more willing to buy talent. This is concerning because Mercer research shows that tenure is the primary human capital driver of operational and financial performance within an organization.

But this proactive approach also must be balanced with future-looking talent needs that companies will have based on plans for product development, market share acquisition, and other goals. For 2025 and beyond, companies will need a proactive compensation approach to anticipate talent needs and rewards for future growth while appropriately rewarding current, especially long-tenured, employees to ensure operational and financial success in the near term.

Build a strong Compensation team -- it's an investment in the present and future of your company.

Looking for more information on how to build your compensation or total rewards team? Give us a call at 1-855-286-5302 or email us at surveys@mercer.com.

¹ Internal Mercer report, “HR is still trapped in transactions,” 2022.