How to Avoid Compensation Mistakes (And What to Do If Your Company Makes Them)

In recent weeks, major companies have suffered significant compensation errors, resulting in many employees being overpaid. Automotive giant Honda accidentally overpaid the bonuses of some 4,000 manufacturing employees at an Ohio factory and opted to seek reimbursement from their overpaid staff. Similarly, a purported glitch in Amazon’s compensation management software overstated employee raises due to the software calculating them from an outdated company stock valuation, rather than Amazon’s current, lower share value.

According to Paycom, three in five Americans live paycheck to paycheck, and in 2021 63% of HR departments had to initiate a retroactive payroll audit. In fact, compensation errors lost American businesses more than $6 billion in 2020 alone. Amid what is still very much a candidate’s market, payroll mistakes can put a considerable dent in achieving recruitment and retention goals, making it more critical than ever that companies are putting processes in place to ensure fair and correct compensation.

But what does it take to avoid these mistakes? HR leaders should take a hard look at their current compensation tools and identify which may be outdated, review and revise data collection and entry processes, and upskill their HR and payroll specialists accordingly. This article will look at three areas companies should focus on to avoid compensation mistakes.

Avoid Cutting Corners in Compensation and Compliance

A recent American Payroll Association report found that 29% of businesses use a payroll system that’s more than ten years old, and many organizations still rely on DIY solutions and insecure spreadsheets. DIY solutions are unregulated, noncompliant, and cumbersome, especially for sensitive data. Outdated software and DIY practices invite the potential for compensation mistakes. The first step organizations can take toward minimizing the risk of payroll errors is to ensure they have the right tools in place.

As a start, HR leaders should audit their current compensation software and processes to determine which are outdated and which are current.

From there, it’s a question of replacing or improving upon the identified weak points in their operations. This may require investment, but in the long run, it can save organizations from debilitating scenarios like an IRS audit, asking employees to pay back overpayments, or retroactive payments to underpaid workers, all of which can be a considerable blow to the employer-employee relationship.

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Diligent Data Entry will Minimize the Risk of Glitches

Amazon’s recent glitch resulted in employees receiving inaccurate, overstated salary raises that were calculated from an older company valuation that had since decreased. Maintaining current and accurate data is critical for large companies that rely on performance metrics, share prices, and sales to calculate raises and bonuses, as opposed to smaller organizations where leadership discusses potential increases with each employee based heavily on observed performance. If initial data entry isn’t accurate, the inaccuracies compound with each automated calculation, exponentially increasing the risk of a significant mistake. If an organization does decide to update or change its software, the first round of data entry must be as accurate as possible; it’s well worth the extra time and care.

HR Needs Upskilling Too

According to recruiting giant LLH, tech acumen is the most desired skill for companies looking to bolster their HR talent. Leaders should be aware of potential technology skill gaps within their HR departments to ensure their employees can operate today’s HCM software effectively. Upgrading and investing in shiny new compensation tools is great, but it’s all for naught if those using the tools aren’t properly trained.

When implementing new HCM software, employers should provide the necessary time for HR departments to get their feet wet and learn the ins and outs of the new systems before full-scale implementation. If a skills gap becomes apparent, it’s time to upskill, as 64% of companies are already planning to upskill their HR departments. The right HCM partner will provide the added benefit of user onboarding and support while implementing the new solution.

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Mistakes Happen: Make Sure Crisis Comms are in Order

Even after taking every precaution, including identifying outdated software and methods, prioritizing optimal data entry, and apt workforce development, mistakes still happen, whether human or otherwise, leaving employee morale at stake. In times of crisis, employees look to their leadership for a resolution, and a well-thought-out crisis communications strategy can significantly decrease the likelihood of long-term internal dissatisfaction. To curate an effective strategy, the payroll and communications teams should be in regular contact and draw up plans for different scenarios together. Executive leadership must also be involved in these conversations to ensure crisis strategy remains in line with company culture.

To better balance the books and avoid compensation errors, the first step is taking stock of your current processes and ensuring they are up to date, even if that comes with an investment. After that, it’s essential to keep the factors affecting compensation as accurate and current as possible to avoid possible miscalculations. With today’s software comes a responsibility to educate employees on properly implementing and operating the new tools. Lastly, mistakes can still happen despite our best efforts, so clear communication and scenario planning are always necessary. After all, no company is immune to mistakes, so it’s best to do everything possible to minimize risk and even plan for the worst.

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