Recent research finds most compensation professionals are simply relying on benchmarking and ongoing reporting to inform their pay decisions, but, by staying away from more sophisticated analytic techniques, organizations may risk leaving a lot on the table for both sides.
If it ain't broke, don't fix it, as the old saying goes.
While compensation professionals' methods for making pay decisions may not be broken, a recent Mercer and WorldatWork study suggests they could at least use some tweaking to incorporate more sophisticated techniques.
The survey of compensation professionals at 560 organizations in North America finds that most compensation professionals use techniques such as benchmarking among internal and external peer groups (95 percent and 90 percent, respectively) and ongoing reporting (87 percent) to make pay decisions in their organizations. Meanwhile, the use of more sophisticated analytical techniques -- projections, simulations and predictive modeling -- was significantly lower, at 80 percent, 64 percent and 43 percent, respectively.
A key contributor to compensation professionals' continued reliance on more "traditional" methods such as benchmarking and ongoing reporting is a certain comfort level with those established techniques, says Kerry Chou, senior practice leader with WorldatWork, a Scottsdale, Ariz.-based provider of research focused on global human resources issues, including compensation and benefits.
"[These findings] are a great example of 'Because it's always been done this way,' " says Chou.
"Compensation professionals have, for decades, been using benchmarking and ongoing reporting as the primary techniques for determining an organization's pay levels. Benchmarking usually takes the form of analyzing market pay levels from purchased salary surveys, and ongoing reporting looks at things such as internal time-to-fill or voluntary turnover rates."
Many firms don't use more sophisticated analytics in their compensation programs because it's very difficult to measure their effectiveness, notes Marc Hodak, founder and managing director of Hodak Value Partners, a New York-based management consulting firm.
"In my opinion, that relationship between programs and profitability is ultimately the only one worth measuring via investment in more sophisticated analytics," says Hodak. "Benchmarking addresses a question that everyone agrees must be answered: Are we competitive? In other words, does our firm pay what it must pay to attract the talent it needs, but not any more? Beyond that, many HR organizations 'get fuzzy' on both what they ask and how they answer it."
Compensation professionals in many organizations are also somewhat bound by leadership's desire to base pay decisions largely on external market data, adds Jack Dolmat-Connell, CEO of DolmatConnell & Partners, a Waltham, Mass.-based executive-compensation consulting firm.
"Most executives and board members are most interested in what the market is paying, in terms of making these decisions," he says, "as most executives don't want to try and justify comp decisions based on projections."
Still, compensation and HR professionals should incorporate more sophisticated techniques such as projections, simulations and predictive modeling to augment benchmarking and reporting as analytic techniques, says Chou.
"One of the fundamental deficiencies of benchmarking and internal reporting is that you're primarily looking backward at what's already happened. This data leaves the interpreter to his or her own devices in determining how their rear-looking data may or may not predict what will occur in the future," she says. "These more sophisticated techniques are designed to use historical data, in part, to help project what may happen in the future, given a set of assumptions that can be manipulated based on projections or simulations."
In addition to providing a glimpse at how an individual and the organization may perform in the future, these techniques can also be used to discover new trends that aren't readily apparent on the surface, Chou continues.
"For example, your organization may have a turnover problem, but you're not sure why. There doesn't seem to be any real pattern as to who is leaving," she says. "By employing some of these more complex techniques, you may discover through mathematical means that a certain type of employee is much more likely to leave, which you would never have discovered just by looking at statistics on the surface or through normal reporting."
The study indicates that many compensation professionals (67 percent) feel they have the ability and expertise to effectively use such high-end analytics, and another 76 percent of respondents said their top executives and HR leaders have requested workforce projections. About half of those same participants, however, said they lack confidence in data regarding education, competencies and investments in training.
This lack of confidence stems at least partly from the difficulty compensation professionals face in collecting and maintaining this type of data, Chou explains. "This information needs to first be collected, and done so in a way that can be used," she says. "For instance, do we set up our employee database to collect education data? And if so, what buckets do we create -- associate degrees, bachelor's degrees, master's degrees, MBAs, Ph.Ds and so on -- and do we care if an employee's degree is from Harvard and another's is from some online university? And how do we verify these degrees?"
While implementing these more complex techniques presents challenges, HR and compensation leaders can take a series of steps to ensure the methods are effective, says Chou.
"First, understand your organization's pay strategy, meaning who you're trying to attract, how you want to structure your rewards -- mix of base pay, incentives and bonuses, equity, benefits, perquisites, for example -- and where you want to position yourself versus the rest of the market."
"Secondly, map out what data elements would be good indicators in assessing your success in achieving this strategy," she says. "In choosing those elements, consider how they will be collected, verified and maintained. Some will fall off the list, since the cost of collection, verification and maintenance will exceed the expected value. Also, determine what reports will be generated, including the methodology and frequency, and provide training on analytical techniques to your staff as needed."
Beyond training employees, HR must also educate managers, executives and their board of directors about why compensation should be looked at through a different lens, and explain why the market should just be one factor to consider, adds Dolmat-Connell. Moreover, HR leaders must have a firm grasp on how to develop and explain these techniques, and ensure that the data they're compiling and using to inform pay decisions is trustworthy, he says.
"Be able to have 100-percent trust in the data you're using," he says. "If mistakes occur, decision-makers will not trust the results. Data accuracy equals credibility."