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Compensation Is Hitting Its Digital Transformation Moment

Forbes EQ

Written by Lisa Wallace and Enrique Esclusa, Cofounders & Co-CEOs, Assemble

Compensation is experiencing its digital transformation moment.

What is the full value of my compensation? How was it determined, and by whom? Am I paid competitively in the market? With the 2022 merit and bonus season behind many of us, and a year of looming economic uncertainty ahead, more employees and companies across America are asking hard questions about compensation than ever before.

Attention to what employees are paid for their contributions has skyrocketed in the past several years, as the COVID-19 pandemic dramatically disrupted the manner and method with which employees, particularly white collar knowledge workers, show up to and perform their jobs. This shift demands new tools and methods for managing compensation in order for businesses to succeed. We are experiencing compensation’s “Digital Transformation” moment, and it’s long overdue.

Compensation and Total Rewards Professionals Are Aging Out of the Workforce

The practice of determining what and why a certain employee is paid is usually run as a sub-function under Human Resources. Traditionally called Compensation & Benefits, it has more recently been rebranded to “Total Rewards” to more fully capture non-cash components of employee compensation like perks and stock-based compensation.

Total Rewards is historically a back-office business function, and it’s a critical one. Responsible for not only ensuring that a business effectively attracts and retains top talent through competitive pay, it must also: ensure that pay strategies are fair and equitable across all employees, especially protected classes; answer board-level questions about a company’s fundamental talent strategy; and comply with a growing number of laws governing employee pay, pay visibility, and privacy. In fact, Total Rewards usually manages the largest budget in the business overall, as employee compensation is generally the largest operating expense and can comprise up to 50%-80% of a business’s total expenses, directly impacting its bottom line.

Despite the criticality of this function, compensation professionals are aging out of the workforce at an alarming rate, and not getting backfilled. According to the Bureau of Labor Statistics, the total number of compensation professionals in the United States dropped by 17% from 2016 to 2022. Worse yet, of those remaining in the workforce, 48% are aged 45 years or older and less than 25% are under the age of 34. Should these trends continue, we should expect U.S. companies to experience a gap between the demand for Total Rewards roles and the available compensation workforce.

Pay Transparency Laws and Market Volatility in 2023 Are Making the Job Harder than Ever Before

Just as compensation professionals are leaving the workforce, we will see the quantum of work surrounding compensation balloon in 2023 and beyond.

Immediately succeeding the pandemic-era shift to remote work, 2022 ushered in a wave of legislation around pay transparency laws in major U.S. states, most notably in California, New York, Illinois, and Washington State — all of which are set to be enforced for the first time this year. While the specifics of each law vary, most require the disclosure of pay ranges in internal and external job listings, increased standards for data retention of employee compensation records, and mandatory state reporting. And the penalties from non-compliance are large. Most states are implementing stringent penalty fees per incident of non-compliance, and many employment law firms are predicting an explosion in pay equity-related litigation as employees are armed with more information about their compensation than ever before.

Exacerbating this workload are complications arising from macroeconomic uncertainty and market volatility. Employers will spend additional time scrutinizing compensation-related budgets as the market downturn demands greater efficiency and puts a squeeze on profits. At the same time, employers will revisit which employee perks and benefits are essential, and cut those that aren’t. Finally, cash and stock-based compensation strategies will shift as companies respond to changes in stock prices and a movement to retention-driven talent strategies vs. recruiting-driven strategies.

As with previous recessions, different industries will be affected differently, and organizations must be prepared to respond in accordance with the realities they face. Each organization’s response will be a board-level issue in 2023, the strategy for which will be carried out by an increasingly overburdened and under-resourced Total Rewards team.

Compensation Has Been Left Behind by the SaaS Revolution

At most businesses, building and executing a Total Rewards strategy involves a tangled web of benchmarking surveys, complicated audits, statistical analyses, and cross-functional collaboration across Finance, HR, Leadership, and more. The job is quantitative and manual, typically involving dozens of stakeholders across an organization and a hefty dose of third party consulting help.

Despite the critical importance of compensation, it’s been left behind by the SaaS revolution. Customer relationship management (CRM) left spreadsheets decades ago thanks to the advent of CRM systems like Hubspot and Salesforce, driving huge efficiencies and better outcomes for sales and marketing teams everywhere. Similar revolutions have taken place for Enterprise Resource Management (ERP), spend management, and other business categories that have enabled organizations to dramatically reduce costs and drive efficiencies.

These other categories share many of the same qualities with compensation: They are strategic and business-critical, dynamic, require ongoing maintenance and attention, and involve multiple stakeholders and sensitive data. Even still, compensation has been left in the lurch. Today, most organizations continue to power their compensation models with spreadsheets and expensive external consultants. The software tooling that does exist is generally too narrow in scope to address the full problem, and isn't widely adopted as a true system of record in the enterprise.

Software Tooling Will Digitally Transform Compensation in the Next 5 Years

This status quo is far too manual and labor-intensive to meet the growing challenges of the future of work. Up until now, most digital transformation initiatives brought the efficiencies of software to other business functions. It is high-time for compensation to experience a similar modernization to software-driven processes that will not only reduce labor costs, but enable new workflows required in a modern enterprise, like pay equity monitoring and compliance.

Employers who fail to adapt their existing workflows to a digital era risk non-compliance, and worse, non-competitiveness. Compensation is the foundation of a business’s strategy to attract and retain its most valuable asset — its people — and the costs of getting it wrong are enormous. Big changes are coming to how all organizations manage compensation in the coming years. Those that get a head start will gain an edge in an increasingly complex and competitive environment.

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