Total Compensation Management

Taming Costs and Rewarding Employees

April 2008
Total Compensation Management
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Executive Summary
Incentive compensation programs have been used successfully for years to Research Benchmark
motivate sales professionals. Now, a growing number of companies are Aberdeen’s Research
looking to build on that model and apply it throughout the organization — Benchmarks provide an in-
with total compensation management. The motives are to better align depth and comprehensive look
employee performance with business goals, and to increase employee into process, procedure,
satisfaction and retention. methodologies, and
technologies with best practice
This report, a compilation of survey responses from 471organizations identification and actionable
(representing companies of all sizes, industries, and geographies), provides a recommendations
roadmap for organizations that desire to implement a total compensation
management program, and a system to effectively manage the program. It
examines the Best-in-Class strategies to use total compensation as a
behavior modification tool, and to align compensation with employee value.
Best-in-Class Performance
Aberdeen used four key performance criteria to distinguish Best-in-Class
organizations at designing and managing total compensation programs:
• 90% of Best-in-Class improved revenue per employee
• 83% of Best-in-Class improved labor costs as a percentage of sales
• 73% of Best-in-Class improved employee job satisfaction
• 64% of Best-in-Class improved employee retention
Competitive Maturity Assessment
Survey results show that the firms enjoying Best-in-Class performance
shared several common characteristics:
• 87% have partially or fully integrated total compensation data "A good program would attract
collection with other workforce management applications and retain the best candidates."
• 76% have clearly defined compensation policies ~ Business Process Manager,
• 75% have compensation policies clearly communicated to US-based Retail Organization
employees
• 70% have partially or fully automated their data collection
Required Actions
In addition to the specific recommendations in Chapter Three of this
report, to achieve Best-in-Class performance, companies must ensure that a
total compensation management program:
• Is competitive in the local job market
• Contains performance benchmark goals that are obtainable
• Rewards the right employees at the right times for the right reasons

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Table of Contents
Executive Summary....................................................................................................... 2
Best-in-Class Performance..................................................................................... 2
Competitive Maturity Assessment....................................................................... 2
Required Actions...................................................................................................... 2
Chapter One: Benchmarking the Best-in-Class ..................................................... 4
Aberdeen's Analysis................................................................................................. 4
Total Compensation Management Defined ....................................................... 5
The Maturity Class Framework............................................................................ 5
The Best-in-Class PACE Model ............................................................................ 6
Chapter Two: Benchmarking Requirements for Success .................................... 9
Competitive Assessment......................................................................................11
Capabilities and Enablers......................................................................................12
Chapter Three: Required Actions .........................................................................16
Laggard Steps to Success......................................................................................16
Industry Average Steps to Success ....................................................................16
Best-in-Class Steps to Success ............................................................................17
Appendix A: Research Methodology.....................................................................19
Appendix B: Related Aberdeen Research............................................................21

Figures
Figure 1: Top Pressures Driving Total Compensation Management for All
Organizations ................................................................................................................. 4
Figure 2: Strategic Use of Compensation................................................................ 7

Tables
Table 1: Top Performers Earn Best-in-Class Status.............................................. 6
Table 2: The Best-in-Class PACE Framework ....................................................... 7
Table 3: The Competitive Framework...................................................................11
Table 4: Integration of Compensation Management and Other Human
Capital Management Applications ...........................................................................14
Table 5: The PACE Framework Key ......................................................................20
Table 6: The Competitive Framework Key ..........................................................20
Table 7: The Relationship Between PACE and the Competitive Framework
.........................................................................................................................................20

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Chapter One:
Benchmarking the Best-in-Class
Aberdeen's Analysis
Total Compensation Programs
Money talks. In fact, there is nothing else in the workplace that sends a
louder message to employees. So it comes as no surprise that when Unlike traditional sales
organizations want to get the attention – and retention – of employees, the incentive programs that award
first place they turn to is payroll. commissions to sales
professionals, total
But in the midst of a sour economy and tight labor budgets, the answer compensation programs include
doesn't lie in padding out payroll. It comes from using payroll more wisely. all monetary and non-monetary
This is driving new interest in total compensation programs, in order to awards and rewards that each
better align employee behavior with business goals, and to better reward worker receives, and includes
employees based on the actual value they provide to the organization. all employees within the
organization.

Top Pressures are Recruiting and Retention A total compensation program

determines:
The top two pressures cited by organizations for pursuing total
compensation programs – and the systems to manage such programs – are √ who gets what
competition for skilled labor and the threat of losing of key employees
√ in which amounts
(Figure 1).
√ for what accomplishments
Figure 1: Top Pressures Driving Total Compensation
Management for All Organizations

100%

76%
80%

60% 50%

40%

16% 15%
20%

0%
Competition for Loss of key Global or Compliance
skilled labor employees geographically requirements
dispersed
w orkforce

Source: Aberdeen Group, April 2008

Skilled workers are at a premium, and organizations must do everything

possible to find and retain them. But as research from Aberdeen Group
reveals there is still much confusion on how to do it right, a general lack of
visibility into many compensation programs being created, and a lot of bad
habits being brought into the process.

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The Same Pressures Still Apply

Growing interest in compensation management is reinforced by data
collected in other recent Aberdeen reports, where aligning business goals
with employee performance and improving employee retention emerge as
top pressures in each case.
Aberdeen's December 2007 report Sales Compensation Management: Coin-
Operated Productivity, revealed that 90% of Best-in-Class organizations
improved their plan alignment with strategic goals. Similar results emerged
from Aberdeen's March 2007 report Incentive Compensation Management:
Aligning Employee Performance with Business Goals. Top pressures revealed by
all organizations in that report include:
• 76% cited the need to align employee behavior and performance
with business goals
• 47% cited the need to increase revenue and profit
• 38% cited the need to improve retention of other (non-sales)
employees

Why Is This All So Hard?

In addition to external pressures, all organizations surveyed report a variety
of internal challenges to managing an effective total compensation program:
• 30% report unequal salary parity across agencies, divisions, or
facilities
• 26% complain of the time required to design or change a
compensation program
• 23% indicate they have an overly-complex system for awarding
bonuses
• 22% identify poor employee morale or job satisfaction among staff

Total Compensation Management Defined

Still relatively new, total compensation management takes its cue from
traditional sales incentive compensation — which involves a pay-per-
performance model and the awarding of commission payments for volume
of sales obtained. But total compensation programs are much broader in
scope, and involve the entire staff.
Total compensation includes all of the awards and rewards that each
employee receives — including merit raises, bonuses, on-the-spot rewards,
tuition reimbursement, training, perks and benefits, gift certificates or
vouchers, stock programs, etc.

The Maturity Class Framework

Adopting a total compensation management program starts with ensuring
that the compensation being awarded is fair, competitive, and results-
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oriented. Large benefits from the program are measured by its ability to
impact the organization's bottom line, and that is where an effective
compensation management system comes into play.
As data from this report reveals, the greatest gains from total compensation
efforts have been with those organizations that automate the process of
collecting compensation data, and integrate compensation management with
other workforce management applications.
To measure the Return on Investment (ROI) of a total compensation
management program, Aberdeen collected data against 13 metrics assigned
to distinct workforce management elements, including improvements seen
in both revenue and retention. The four Key Performance Indicators (KPIs)
selected measure efficiencies realized, as well as productivity gained, across
the workforce management spectrum, including:
"The benefits [are]: fairness, a
• Employee retention clearly designed system, openly
communicated. [The]
• Employee job satisfaction drawback: [it is] too
• Revenue per employee standardized, and lacks
individualism.”
• Labor costs as a percentage of goods sold
~ Consultant,
Table 1: Top Performers Earn Best-in-Class Status US Government Agency

Definition of
Mean Class Performance
Maturity Class
ƒ 90% increased revenue per employee
Best-in-Class: ƒ 83% improved labor costs as a percentage of goods
Top 20% of aggregate sold
performance scorers ƒ 73% improved employee satisfaction
ƒ 64% increased employee retention
ƒ 46% increased revenue per employee
Industry Average: ƒ 2% improved labor costs as a percentage of goods
Middle 50% sold
of aggregate
performance scorers ƒ 32% improved employee satisfaction
ƒ 17% increased employee retention
ƒ 5% increased revenue per employee
Laggard: ƒ 0% improved labor costs as a percentage of goods
Bottom 30% sold
of aggregate
performance scorers ƒ 3% improved employee satisfaction
ƒ 4% increased employee retention
Source: Aberdeen Group, April 2008

The Best-in-Class PACE Model

Using total compensation solutions to achieve corporate goals requires a
combination of strategic actions, organizational capabilities, and enabling
technologies, as illustrated in Table 2.

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Table 2: The Best-in-Class PACE Framework

Pressures Actions Capabilities Enablers
ƒ Competition for ƒ Align employee ƒ Standardized processes ƒ Time and attendance tools
skilled labor behavior with for collecting ƒ Budgeting tools
company's compensation data ƒ Employee performance management tools
objectives ƒ Clearly defined ƒ Reporting tools
ƒ Reward excellence compensation policies
ƒ Balanced scorecard goal-setting and
in result attained ƒ Clearly communicated measurement system for executing the
(e.g. team goal compensation policies company's strategy
achieved, individual ƒ Documented procedures
quota met) ƒ Workforce analytics tools
for collection
ƒ Compliance analytics tools
compensation data
ƒ Employee self-service portal for viewing
ƒ A single data repository
compensation and benefits accrued
for all compensation data
ƒ Tools that distribute overtime to qualified
employees in accordance with
configurable business rules
Source: Aberdeen Group, April 2008

Strategic Actions
There are several common steps that Best-in-Class organizations are taking
to address the pressures they are experiencing. One that stands out is the
two fold strategy that uses compensation plans to influence employee
behavior and reward excellent results (Figure 2).

Figure 2: Strategic Use of Compensation

60%
48%
45% 45%
42%
40%
29% 29%

20%

0%
Align employee behavior w ith Rew ard excellence in results
compensation aw ards attained

Best-in-Class Average Laggard

Source: Aberdeen Group, April 2008

Best-in-Class organizations are more aggressive at recognizing,

acknowledging, and rewarding individual performance. That aids in the
strategy of being perceived as an employer of choice. And it makes current
employees feel more appreciated, and more likely to stick around.

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Aberdeen Insight — Strategy

As is to be expected, there is also strong bottom-line motivation for

embracing total compensation. Organizations need to squeeze as much
productivity as possible from staff, but in a way that doesn't burn out
workers or drive them away. Interviews with organizations participating
in this research confirm that total compensation is an effective carrot for
leading employees in the direction of increased productivity, and making
deserving workers feel singled out for their efforts. Everyone expects to
be paid fairly; but some deserve to be paid more fairly than others.
• Rather than reward employees after-the-fact for having worked
hard, total compensation management identifies the desired
behaviors needed to meet business goals, and proactively drives
employees toward those behaviors. A total compensation
program determines who gets what, in which amounts, and for
what accomplishments.
• The well-constructed program tracks all of these elements
against performance, retention, and budget metrics in order to
align the right compensation to the right people for the right
reasons.
• The ideal program enables managers to model different
compensation scenarios and to analyze compensation data for
budgeting and scheduling purposes.

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Chapter Two:
Benchmarking Requirements for Success
Interviews with organizations participating in this report reveal that the Fast Facts
most important elements of a total compensation system, which provide full There is a wide gap in the level
functionality and greatest satisfaction, are that it be easy to use by managers, of satisfaction reported by
provide employee access to individual profiles, and properly tie survey participants with their
compensation awards with measured performance. How well a company total compensation
can master those tasks will determine what benefits it can expect to realize management systems:
from a total compensation program. √ 70% of Best-in-Class
In addition, two thirds of the companies interviewed for this study indicated organizations are somewhat
that they would be interested in purchasing an integrated application that or very satisfied
combined employee compensation and sales compensation together if one √ 46% of Industry Average
were available. organizations are somewhat
Case in Point — Harbor Group Management or very satisfied
√ 30% of Laggard organizations
Harbor Group Management Company is using an employee performance are somewhat or very
and talent management suite to: satisfied
• Foster a performance-oriented culture; one in which employees
focus on the organization’s overall strategic goals
• Increase employee engagement and improve accountability
• Improve employee retention and adhere to compensation
budgets
Harbor Group Management Company is a private real estate investment
and property management firm which controls a portfolio of worldwide
assets valued in excess of $2 billion. The company’s real estate holdings
include over eight million square feet of commercial space and more than
14,000 apartment units. Harbor Group is headquartered in Norfolk, VA,
with offices in New York, Chicago, London and Tel Aviv.
Attitude Adjustments
Harbor Group wanted to foster a performance-oriented culture; one in
which employees focus on the organization’s overall strategic goals. To
do this, Harbor Group knew it would have to get managers to better
recognize employee results based on specific actions, and compliment /
reward them appropriately. The overall goal was to develop individuals
to adopt high performance attitudes, emotions, and behaviors.
Harbor Group decided to overhaul its appraisal process, and focus on a
model that was objective rather than subjective, and that was based on
behaviors rather than traits. “We were aligning all our organizational
systems to support talent management,” said Ron Bates, vice-president of
HR for Harbor Group Management Company. “In order to manage our
employees’ long-term growth potential, we knew their appraisals had to
be specific to job function and demonstrate to them that they could
control the outcome.”
continued

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Case in Point — Harbor Group Management

The Search for a Solution

When sourcing an automated employee performance and talent
management system, Harbor Group wanted a solution that supported all
types of appraisals (semi-annual, probationary, project performance, etc.),
and included extensive form configuration options and complex scoring
and weighting. It also had to include multi-rater / peer review
functionality, provide real time status on every step in the process and
enable managers to drill down into their organizations. “We were
looking for a tool to provide employees with candid feedback and
potential improvement opportunities,” said Bates. “We needed capacity
to handle lots of detailed information, because we were making coaching
a part of each employee’s development discussion, and creating
mentoring relationships to build motivation and engagement.”
Harbor Group also needed to integrate a compensation management
system that would suggest pay adjustments based on appraisal scores and
a performance matrix. It had to allow for complex bonus calculations
based on multiple profiles, and verify recommendations against budget
guidelines. “We chose an appraisal and compensation solution because it
most closely fit with our reward-for-performance culture,” said Bates.
“The application’s tools provided us with a high level of accountability for
our managers, to help them defend their appraisal and compensation
decisions to all members of our corporate compensation committee.”
Performance and Retention Gains
With the implementation of the new total compensation management
system, Harbor Group has seen increased employee engagement and
improved accountability. Employees now perceive that the appraisal
process provides fair compensation adjustments and rewards.
“Our new communication process is leading to higher trust in the
company and understanding of our goals,” said Bates. “We are seeing our
managers make honest and objective assessments, and everyone has a
better understanding of our talent development needs.”
Harbor Group’s compensation culture changes have also improved
employee retention and ensured that the compensation budget is
adhered to. “We have ended our blanket bonus programs and the total
compensation management system has helped us better recognize top
performers through performance management,” said Bates. ”Increased
employee engagement in corporate goals follows naturally. We are well
on our way to a long-term employee talent management plan that is
founded in a pay-for-performance culture.”

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Competitive Assessment
Aberdeen Group analyzed the aggregated metrics of surveyed companies to
determine whether their performance ranked as Best-in-Class, Industry
Average, or Laggard. In addition to having common performance levels, each
class also shared characteristics in five key categories: (1) process (the
approaches they take to execute their daily operations); (2) organization
(corporate focus and collaboration among stakeholders); (3) knowledge
management (contextualizing data and exposing it to key stakeholders);
(4) technology (the selection of appropriate tools and effective
deployment of those tools); and (5) performance management (the
ability of the organization to measure their results to improve their
business). These characteristics (identified in Table 3) serve as a guideline
for best practices, and correlate directly with Best-in-Class performance
across the key metrics.
Table 3: The Competitive Framework
Best-in-Class Average Laggards
Standardized processes for collecting compensation data
76% 67% 55%
Process
Documentation of procedures for collecting compensation data
68% 57% 54%
Compensation policies clearly defined
76% 56% 50%
Organization
Compensation policies clearly communicated to all employees
75% 55% 41%
Ability to drill down to transactional level
51% 32% 26%
Knowledge
Proper training of managers on reporting tools
51% 27% 19%
Use the following tools to enhance total compensation analysis
and planning:
ƒ 79% time and ƒ 72% time and ƒ 60% time and
attendance tools attendance tools attendance tools
ƒ 66% budgeting ƒ 51% budgeting ƒ 39% budgeting
tools tools tools
ƒ 64% employee ƒ 46% employee ƒ 41% employee
performance performance performance
management tools management tools management tools
Technology
ƒ 63% reporting ƒ 45% reporting ƒ 41% reporting
tools tools tools
ƒ 63% a single ƒ 47% a single ƒ 32% a single
repository for repository for repository for
compensation data compensation data compensation data
ƒ 39% workforce ƒ 23% workforce ƒ 22% workforce
analytic tools analytic tools analytic tools
ƒ 39% compliance ƒ 24% compliance ƒ 23% compliance
management tools management tools management tools

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Best-in-Class Average Laggards

Review the effectiveness of the compensation program at least
every six months
35% 19% 18%
Performance
Conduct performance evaluations on employees at least every
six months
43% 33% 22%
Source: Aberdeen Group, April 2008

Capabilities and Enablers

The essential ingredients of a total compensation management strategy that
produces top results includes the proper mix of process, organizational
knowledge, technology, and performance management.
Process "[Our program is] driven by
lack of liquidity in labor market
A majority of Best-in-Class organizations (76%) have standardized the and [a] key skills shortage."
processes for collecting compensation data; and a majority of Best-in-Class
(68%) also documents the procedures for collecting such data. This is ~ Senior Manager, US-based
significant because of the role that both play in creating parity in a Software Development
Company
compensation program, and providing visibility into the data.
A minority of organizations at all levels are currently tracking total
compensation data throughout the entire organization: 46% of the Best-in-
Class; 37% of Industry Average organizations; and 35% of Laggard organizations.
Performance
The Best-in-Class are more aggressive at ensuring that compensation data is
collected accurately, and this in turn reduces the percentage of payroll that is
disputed. Improved payroll accuracy over the past 12 months is reported by
23% of the Best-in-Class, 9% of the Industry Average, and 2% of Laggards.
Anecdotal reporting from organizations participating in this survey reveals
another advantage to more accurate payroll: the resulting decrease in time
spent by employees on so-called "shadow accounting." Shadow accounting is
the practice of an employee independently tracking their work progress or
performance against compensation benchmarks, to ensure they will eventually
be compensation as expected. Since compensation can often come weeks or
months after specific accomplishments, employees can spend an excessive
amount of work time in shadow accounting along the way.

Aberdeen Insights — Culture

While an automated and integrated total compensation management

system can yield large gains in staff performance, job satisfaction, and
employee retention, the results depend on how successful the underlying
compensation program is.
continued

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Aberdeen Insights — Culture

Unfortunately, anecdotal evidence from interviews with companies for

this report, as well as open ended questions within the survey, reveal
that total compensation management programs are frequently built on
very shaky foundations. Senior level executives and managers
participating in this survey cited a host of problems with total
compensation efforts at their organizations which are cultural in nature,
not technical.
The problems include compensation programs that are designed without
employee input; compensation variables that are not clearly explained to
workers; performance quotas that are unrealistic or unreasonable; and
lack of credibility on how performance is measured and evaluated.
The following are some common descriptions of drawbacks to an
organization's compensation program: not taken seriously, suffers from
believability, hidden from employee input, lacks understanding, too much
emphasis on gut feelings, and it depends too much on one person's
judgment.
Clearly, an organization needs to have its compensation house in order
before it can expect automation and integration to make much
difference. And as the descriptions in the previous paragraph illustrate,
many organizations have not involved employees in the process of
creating a compensation program, have not adequately explained the
program to workers, and have lost employee buy-in as a result.
Unfortunately, data from this survey also reveals that most organizations
are still slow at breaking old bad habits, and employee access and visibility
are low on the list of action items being completed.

Organization
The individual ultimately responsible for designing a total compensation plan
varies by organization, though the CEO is more often in this role than
anyone else. Best-in-Class organizations cite the following individuals as
primarily responsible for their total compensation management program:
the CEO (37%); the HR director (27%); a compensation review board or
committee (13%); the CFO (11%).
Actual performance review and compensation award determinations tend
"It's simple to administer;
to be made by the same individuals in all organizations — the employee's however, [it's] not transparent
immediate supervisor and the department head. A differentiator for the to employees."
Best-in-Class, however, is the frequency with which evaluations are
conducted. While the majority of Industry Average and Laggard ~ Vice President, US-based
organizations conduct annual evaluations, the Best-in-Class are more likely Construction Firm
to perform semi-annual or even quarterly reviews.
Knowledge Management
An important benefit from automating compensation management is the
ability to access and analyze data, and this is another area where the Best-in-
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Class are experiencing greater gains. Forty-four percent (44%) of Best-in-

Class organizations have real-time access for managers to generate
compensation reports, as opposed to 23% of all other organizations.
Automation also enables the Best-in-Class to better model and forecast
compensation plans. Currently, 47% of Best-in-Class report they have this
capability (compared to 30% of all other organizations); and an additional
37% indicated they plan to implement this capability.
Automating the process of compensation data collection also greatly
reduces the amount of time needed to administer a compensation program.
Thirty percent (30%) of Best-in-Class organizations, which are much more
aggressive at automating the process, report a reduction in the time needed
to manage their program. That compares to only 13% of Industry Average
organizations, and 10% of Laggards.
Technology
The next step after establishing and documenting compensation collection
processes is to have a central data repository, where all compensation is
stored, and where everyone who needs access to compensation data is
drawing from the same pool. The gap in automation between Best-in-Class,
Industry Average, and Laggard is wide in this area as well. While 63% of
Best-in-Class collect compensation data in a central repository, the
percentage drops to 47% among Industry Average organizations, and 32%
among Laggards.
Best-in-Class organizations are much more likely to integrate a
compensation management application with performance management
applications. That enables the Best-in-Class to more easily identify desired
performance results and quickly tie them to appropriate rewards. Table 4
illustrates the level of integration of compensation management applications
with other workforce management applications.

Table 4: Integration of Compensation Management and Other

Human Capital Management Applications
Application Best-in-Class All Others
Payroll 85% 83%
Employee performance management 71% 58%
Labor budgeting 69% 67%
Benefits management 68% 68%
Competency and assessments 60% 46%
Learning and development 50% 45%
Workforce planning 47% 43%
Workforce analytics 47% 35%
Succession planning 33% 27%
Source: Aberdeen Group, April 2008

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Immediate gain also comes from integrating compensation systems with

competency and assessments tools. This enables the organization to match
available skills against desired performance goals, and identify where
additional training may be needed. It also aids in evaluating whether an
individual employee is likely to meet performance goals or quotas, and in
turn, to receive specific compensation accordingly.

Performance Management
Clearly the investments by Best-in-Class are paying off, with 50% of those
organizations reporting greater manager satisfaction with their
compensation program. The numbers are bleak otherwise, with 16% of
Industry Average organizations reporting the same, and only 6% of Laggards.
Data from our survey confirms that increased automation also enables the
Best-in-Class to better test new compensation plans, to drill down to
transaction details, and to track the effectiveness of compensation programs
over time.
Best-in-Class organizations also tend to review the effectiveness of their
compensation on a more frequent basis, and are therefore able to make
changes to the program more quickly.

Aberdeen Insights — Customer Satisfaction

An important byproduct of employee satisfaction is customer satisfaction.

After all, satisfied employees are happy employees. And happy employees
are the surest way to deal with customers in a friendly, helpful, and
accommodating manner. That is certainly supported by data from this
report: 38% of Best-in-Class organizations reported that customer
satisfaction has increased over the past 12 months; as opposed to 17% of
Industry Average organizations; and only 5% of Laggards. In direct
response, 74% of Best-n-Class organizations reported improving their
customer retention over the past 12 months; as opposed to 33% of
Industry Average organizations; and 19% of Laggards.
Simply put, satisfied workers produce better quality products and
services, which positively impact the bottom line. Forty-percent (40%) of
Best-in-Class companies improved their product or service time to
market over the past 12 months, compared to 21% of all other
organizations.

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Chapter Three:
Required Actions
Whether a company is trying to move its performance in total
compensation management from Laggard to Industry Average, or Industry
Average to Best-in-Class, the following actions will help spur the necessary
performance improvements:

Laggard Steps to Success

• Survey. The first step to creating a total compensation strategy is
to ensure that basic pay rates are competitive in the local market.
Anecdotal evidence gathered for this report confirms that investing
in a total compensation system will be of little gain, if an
organization underpays workers to begin with. Motivating and
retaining workers requires that they want to join or stay with the
organization. Investigate what local pay rates are for the same job
positions. Identify the various bonus plans, perks, and other
amenities are that competitors provide to their workers.
• Reward. Determine who the top performing employees are in the
organization at all levels, and in all job roles. Ensure that a total
compensation plan properly identifies, acknowledges, and awards
compensation based on their contributions.
• Standardize. A major obstacle to being able to analyze and act on
compensation data is a lack of standardization within the
organization on what data should be collected, and through what
process. While 76% of Best-in-Class organizations have standardized
processes in place for compensation management programs, the
number drops to 55% among Laggards. Standardization is critical,
since compensation data can be generated by more than one person
within the organization, and can include numerous operational units,
facilities, or even countries.
• Communicate. Involve employees in creating or expanding a total
compensation program. Clearly explain what is included within the
program, how each employee is measured against performance
metrics, and how they will be awarded and rewarded under the
program. While 75% of Best-in-Class indicate that the compensation
policies at their organizations are clearly communicated, only 41% of
Laggards make that claim.

Industry Average Steps to Success

• Strategize. Identify where total compensation can make an impact
on business objectives. This step addresses the top two strategic
actions cited by Best-in-Class: aligning employee behavior with
company objectives (cited by 48%), and rewarding excellence in
results attained (cited by 45%). This starts with an understanding of

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the organization's critical pain points and their correlation to the

workforce. Detail the performance needs at all levels of the
organization.
• Automate. Significant gains from a total compensation
management program are realized when an organization automates "[Our program is] not properly
the process of collecting compensation data. While 70% of the Best- related to market; not specific
in-Class have fully or partially automated the process of collecting enough; and not fully
compensation data, the percentage drops to 52% among Laggards. integrated."
Automating the process enables the organization to collect more ~ Information Technology
accurate data, to make it accessible to those who need it, and Manager, US-based Financial
reduces the time and effort needed to evaluate performance and Services Firm
determine the appropriate compensation awards.
• Integrate. The greatest gains from a total compensation
management system come when an organization uses that data to
drive its other workforce management strategies. Fifty-four percent
(54%) of all organizations that have integrated compensation
management with other human capital applications report
improvements to revenue per employee, versus 40% of
organizations that have not integrated the application. Organizations
should integrate as many of their human capital management
systems as possible into the compensation management system,
including performance management, labor budgeting, benefits
management, and competency and assessments applications.

Best-in-Class Steps to Success

• Empower. Provide managers with visibility into the total
compensation program. Ensure that the appropriate individuals in
the organization are able to access compensation data in order to
analyze and act on it.
• Verify. Provide managers the ability to model, test, and review
compensation plans at least every six months to evaluate
effectiveness, and to recommend changes when warranted. The
Best-in-Class are twice as likely to review compensation plans at
least this frequently: cited by 37% of the Best-in-Class, 19% of
Industry Average companies, and 18% of Laggards.
• Clarify. Give all employees access to information on their individual
compensation plan, including the performance benchmarks that they
are measured against, the compensation awards they can quality for,
and how they are stacking up at any time toward meeting goals.

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Total Compensation Management
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Aberdeen Insights — Summary

A total compensation management program — and the system to

manage the program — are most likely to be successful when an
organization keeps performance goals simple, realistic, and achievable.
The primary reasons that organizations are pursuing total compensation
management are to attract and retain workers. Therefore, the program
needs to motivate and encourage employees, not frustrate and alienate
them.
Data from this survey, and anecdotal evidence from interviews with
companies involved with the research, confirm that an overly complex
compensation program can foster employee dissatisfaction — quite the
opposite of a program's intent.
When employees feel there are too many variables involved in earning
awards, or that their qualification for rewards is tied to too many other
individuals, they quickly lose hope on obtaining rewards at the end of the
process. Likewise, when employees don't understand how their
compensation amounts are determined, or can't track their performance
against the benchmarks they are held to, managers report that staff
quickly become frustrated.
Total compensation management is an ideal carrot to lead employees to
desired behaviors. That, in turn, provides performance improvements
and bottom-line gains.
But when an organization makes the decision to use a total compensation
programs as that carrot, it needs to allow each employee to be able to
take occasional bites.

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Total Compensation Management
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Appendix A:
Research Methodology
Between February and March 2008, Aberdeen examined the use, the Study Focus
experiences, and the intentions of more than 470 enterprises adopting
compensation programs. Responding HCM and business
unit executives completed an
Aberdeen supplemented this online survey effort with interviews with select online survey that included
survey respondents, gathering additional information on strategies, questions designed to
experiences, and results. determine the following:

Responding enterprises included the following: √ What is driving the

implementation of total
• Job title / function: The research sample included respondents with compensation plans
the following job titles: senior management (CEO, COO, CFO,
√ How compensation is used
CIO, president) (28%); vice president (11%); director (22%); to drive behavior and
manager (26%); others (13%). In terms of functions in their reward performance
respective organization, the majority of respondents (40%) were in
human resources (including payroll, talent management, training and √ Current and planned use
organizational development). Other functional areas represented compensation management
finance (10%), sales (9%) and business process management (9%). technologies

• Industry: The research sample included respondents from a variety √ The benefits, if any, that
have been derived from
of industries. Hi-tech represented 19% of the sample, followed by
compensation initiatives
education (9%), finance / banking (9%), health / medical services
(5%), and industrial equipment manufacturing (5%). The public The study aimed to identify
sector represented 5% of the sample. emerging best practices in this
are and to provide a
• Geography: The majority of respondents (76%) were from North framework by which readers
America. Remaining respondents were from the Asia-Pacific region could assess their own internal
(9%), Europe (9%), Middle East / Africa (4%), and South / Central capabilities
America (2%).
• Company size: Fourteen percent (14%) of respondents were from
large enterprises (annual revenues above US$1 billion); 35% were
from mid-sized enterprises (annual revenues between $50 million
and $1 billion); 51% were from small businesses (annual revenues
less than $50 million.
• Headcount: Sixteen percent (16%) of respondents had over 5000
employees; 14% had between 1000 and 5000 employees; 22% had
between 250 and 1000 employees; 48% of respondents came from
companies with less than 250 employees.
Solution providers recognized as sponsors were solicited after the fact and
had no substantive influence on the direction of this report. Their
sponsorship has made it possible for Aberdeen Group to make these
findings available to readers at no charge.

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Total Compensation Management
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Table 5: The PACE Framework Key

Overview
Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities,
and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as
follows:
Pressures — external forces that impact an organization’s market position, competitiveness, or business
operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive)
Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the
corporate business model to leverage industry opportunities, such as product / service strategy, target markets,
financial strategy, go-to-market, and sales strategy)
Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people,
brand, market positioning, viable products / services, ecosystem partners, financing)
Enablers — the key functionality of technology solutions required to support the organization’s enabling business
practices (e.g., development platform, applications, network connectivity, user interface, training and support,
partner interfaces, data cleansing, and management)
Source: Aberdeen Group, April 2008

Table 6: The Competitive Framework Key

Overview

The Aberdeen Competitive Framework defines enterprises In the following categories:

as falling into one of the following three levels of practices
and performance:
Best-in-Class (20%) — Practices that are the best
currently being employed and are significantly superior to
the Industry Average, and result in the top industry
performance.
Industry Average (50%) — Practices that represent the
average or norm, and result in average industry
performance.
Laggards (30%) — Practices that are significantly behind
the average of the industry, and result in below average
performance.
Process — What is the scope of process
standardization? What is the efficiency and
effectiveness of this process?
Organization — How is your company currently
organized to manage and optimize this particular
process?
Knowledge — What visibility do you have into key
data and intelligence required to manage this process?
Technology — What level of automation have you
used to support this process? How is this automation
integrated and aligned?
Performance — What do you measure? How
frequently? What’s your actual performance?

Source: Aberdeen Group, April 2008

Table 7: The Relationship Between PACE and the Competitive Framework

PACE and the Competitive Framework – How They Interact
Aberdeen research indicates that companies that identify the most influential pressures and take the most
transformational and effective actions are most likely to achieve superior performance. The level of competitive
performance that a company achieves is strongly determined by the PACE choices that they make and how well they
execute those decisions.
Source: Aberdeen Group, April 2008

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Total Compensation Management
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Appendix B:
Related Aberdeen Research
Related Aberdeen research that forms a companion or reference to this
report includes:
• Integrated Human Capital Management: Over-hyped or Over-due?;
December 2007
• Sales Compensation Management: Coin-Operated Productivity;
December 2007
• The Strategic Development of Core HR Systems; September 2007
• Incentive Compensation Management: Aligning Employee Performance
with Business Goals; March 2007
• The Pay-for-Performance Benchmark Report; March 2006
Information on these and any other Aberdeen publications can be found at
www.aberdeen.com

Author: David Weldon, Research Analyst, Human Capital Management

david.weldon@aberdeen.com
Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having
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This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies
provide for objective fact-based research and represent the best analysis available at the time of publication. Unless
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www.aberdeen.com Fax: 617 723 7897