Is AI the Right Tool for Compensation Management?

The influence of artificial intelligence (AI) in various Human Resources (HR) disciplines is growing and that includes influence over compensation management—an area that has seen significant activity and evolution in the past year driven by the residual effects of the pandemic, inflation and legislative changes.

The year 2023 witnessed a substantial demand for adept compensation management and compensation experts, and we at Fahrenheit Advisors, believe this trend will persist into 2024 and beyond. The primary drivers include the ongoing adjustments to post-pandemic work environments, legislative pressures surrounding pay transparency and increasing minimum wages, and the need for structured pay scales that align with organizational goals and tight market conditions.

One of the hottest topics in the industry is the integration of AI into salary management. While AI’s capabilities are broadening, compensation professionals should approach its use with caution. AI tools, at this stage, still lack the data integrity that comes with human expertise. Traditional salary surveys, where data is submitted by human resource departments and vetted by compensation specialists, provide a level of scrutiny and validity that AI-sourced data cannot currently match. That is not to say we won’t see this change over the course of a few years. We just aren’t there. Yet.

As AI continues to develop, it is crucial to underscore the importance of consulting with compensation experts to ensure that the data driving salary decisions are both accurate and representative of each job. AI tools often present data as ‘predictions,’ which, while insightful, cannot yet replace professional judgment and established sources of compensation data.

Compensation experts also caution against processes that allow personal bias to filter into data gathering efforts. Human nature is such that we only “see” the data we want to see. AI search questions may be designed to provide data that supports a certain level of pay, but the parameters used to get the data may not be consistent with all aspects of a job (e.g., level, requirements, location, company size, etc.). Compensation consultants are impartial third parties who take bias out of the equation and add validity to market data.

Looking ahead, organizations should prepare for continued volatility and shifts in compensation trends due to socio-economic factors and political changes, including this presidential election. An established compensation philosophy that sets the framework for a comprehensive compensation program balancing salaries, benefits, and perks is necessary to navigate these changes effectively.

Advice for HR and compensation professionals going into 2024 includes:

• Develop a Compensation Philosophy: Establish and communicate a clear compensation philosophy that reflects the organization’s stance on market competitiveness.
• Emphasize Data Integrity: Rely on data from credible sources and ensure that AI tools used for compensation analysis have been properly vetted for accuracy and relevance.
• Understand Pay Transparency: Be well-versed in state-specific legislation regarding pay transparency and be prepared to communicate salary ranges effectively.
• Educate and Communicate: Inform management and staff about the rationale behind compensation figures to foster understanding and trust. Start by sharing your compensation philosophy.
• Monitor Legislative Changes: Stay informed about regulatory developments to ensure compliance and adapt compensation strategies accordingly. For more on AI and state-specific HR laws, check out Fahrenheit’s panel interview with Laura Bowser and SHRM’s Faith Alejandra.

As AI’s role in HR matures, it promises to offer valuable insights and efficiency gains. However, human expertise remains indispensable in ensuring fair and competitive compensation practices. With the integration of human judgement and established data sources, plus the thoughtful evaluation of AI tools as they develop, organizations can look forward to effectively navigating the complex landscape of compensation management in 2024 and beyond.

Develop a custom compensation strategy for your organization with the help of Fahrenheit Advisors.

About the authors

Merryman Putnam partners with clients to provide compensation expertise in crafting total compensation packages designed to ensure companies are able to hire the right talent. For 20+ years she has worked with public, private, private equity, government, tribal, and nonprofit entities in a variety of industries including aerospace/engineering, banking/finance, healthcare (including FQHCs), insurance/workers’ compensation, manufacturing, technology/software asset management, transportation and utilities.

As Fahrenheit’s Human Capital Practice Leader, Laura Bowser addresses the HR strategies and pitfalls of creating a work environment that generates innovation, productivity, and inclusiveness—talking about the real, hard choices that business leaders must make, and how to communicate those decisions to boards, executive teams, and employees.