Ventana Research Analyst Perspectives

Compensation practices are currently experiencing a substantial transformation, driven by evolving workforce expectations and rapid technological innovation. This shift is fundamentally reshaping how organizations approach rewards and recognition for workers. Technologies like data analytics enable more precise and personalized compensation management strategies while also fostering greater transparency and equity in how performance is measured and rewarded. These changes reflect a broader effort to adapt compensation practices to meet the dynamic needs of today's workforce and maximize technology to optimize every aspect of rewards systems.

Traditional compensation models were often limited to base salary, bonuses and benefits such as health insurance and retirement plans. They relied on fixed pay structures with minimal attributes, which did not make it easy to incorporate performance-based pay strategies. These models lacked flexibility, creating an extended period of misalignment between structures and real-time market dynamics. The role of technology was limited to payroll processing and recordkeeping, resulting in a lack of access to real-time data and personalization. These models were a great starting point, but from an employee perspective, they existed far past what should have been the point of expiration.

In the first significant innovation cycle to impact organizational thinking about compensation, we welcomed the introduction of human resources information systems and compensation management software. This evolution created a clear path for process improvements, constructed with technology-driven compensation solutions in mind. Compensation planning and management was able to integrate—in technology and process—with other business systems and programs, enabling a more comprehensive approach to reignite employee enthusiasm, yielding a higher quality talent pipeline and better worker engagement and retention. Later, we experienced the integration of cloud-based platforms for real-time market and employee data accessibility and analysis. The data accessibility resulted in a sharp increase in employee satisfaction regarding compensation.

While not perfect, the added technology-based capabilities enabled access to critical information that allowed flexibility and consistency when designing and managing compensation programs. The market analysis and adjustment periods were reduced significantly, resulting in many organizations being able to perform semi-annual (and even quarterly) compensation reviews to better meet worker demands.

Over the past couple of years, employers and software providers have been gearing up for the next big innovation cycle for compensation and rewards. In that time, workers have become clearer and more vocal about their expectations regarding their employee experience. While compensation is a key factor in an employee’s decision to take a job or remain at an organization, it has dropped in the rankings from the top of the list to the middle of the list. There is a growing expectation for more transparency and communication regarding compensation practices, combined with a more complex workforce dynamic and technology toolkit.

At the same time, how employees define compensation has expanded to include a more holistic view of compensation, rewards, recognition and well-being. Yet the available compensation technology supports fixed and semi-flexible compensation models, which do not make it easy for organizations to evolve compensation practices to the next level. By 2028, one-quarter of enterprises using compensation software will incentivize employees to take more of their compensation in variable pay through the platform’s compensation equivalency tools. The competition for talent has never been more complex and organizations must rise to meet the challenge.

We are entering the next major innovation cycle for compensation technologies, strategies and programs, and I could not be more excited. The definition and scope of compensation programs is expected to remain stable, embracing this expanded nature. The workforce of tomorrow will continue to build upon the momentum of recent years, leading to a world where skills-based compensation is a reality with even more exciting opportunities to come. The technology alone will not deliver a plug-and-play experience that revolutionizes compensation strategies and programs, but it will play a substantial role in enablement and sustainment.

Through the continued innovation in HR technology, HR leaders have found a much easier path to becoming a data-driven business partner supporting integrated business planning discussions and decisions. The increased adoption of data analytics across the whole of HR enables them to identify trends and patterns more effectively in all aspects, but most notably regarding compensation.

Technological advances have made it increasingly easier to collect, aggregate and analyze compensation data without adding headcount to support the effort. There are many ways in which these advances impact the practices of compensation planning and management, including:

• Creating a new level of support for personalization and flexibility in compensation strategies, planning and management.
• Enabling integration between performance management activities, learning and development and other incentive programs, resulting in more expansive compensation programs.
• Enhancing transparency and communication about compensation matters, expanding compensation self-service for managers and workers.
• Mitigating bias and ensuring equity by enabling organizations to feel confident and supported by artificial intelligence and other innovations for ongoing analysis.

In the journey ahead, continued technological innovations will create new pathways to modernize compensation practices. As HR systems continue to evolve, the topic of skills will permeate all aspects of the function, including compensation. Skills-based people development strategies and skills-based hiring are becoming more commonly adopted. Skills-based compensation is a reality of our not-too-distant future, enabled by the continued evolution of technology to support the end-to-end worker life cycle.

Continued advances in AI and machine learning will enable new levels of automation and optimization for compensation processes. AI-driven predictive analytics will deliver more accurate forecasting of compensation trends and empower businesses to enact as-needed adjustments. Incorporating natural language processing technologies will further enhance an organization’s ability to democratize engagement with compensation processes across the enterprise and augment interactions between workers and members of the compensation and total rewards teams. Through 2026, the software category for total compensation management will require re-imagining to support GenAI for the entire workforce.

As we navigate the compensation renaissance, it becomes clear that technology is not just an enabler but a game-changer in revamping rewards. By leveraging advanced analytics, AI-driven insights and real-time data, organizations create more equitable, performance-oriented and personalized compensation strategies. These tech-driven approaches enhance worker satisfaction and retention and align more closely with organizational goals.

HR leaders stand at a critical crossroads; now is the time to embrace these innovations and lead their organizations into a future where compensation is dynamic, fair and motivating. Let us seize this moment to transform our compensation models and pave the way for a more prosperous and engaged workforce.

Regards,

Matthew Brown