The Importance of Compliance in Compensation Structures

The importance of compliance in compensation structures

The way you reward your employees says a lot about your organization. Not only about what you value, but also about how well you manage risks. Yet in practice, we still regularly see that compliance in compensation structures is viewed as a necessary evil, something for the legal department. That’s a missed opportunity, because a compliant compensation system forms the foundation for a healthy organizational culture and protects your organization against significant risks. The real impact of compliance goes beyond simply following rules. It’s about creating compensation structures that encourage employees to do the right things, for the right reasons. When your compensation system is not compliant, you risk not only fines and legal proceedings, but also a culture in which wrong behaviors are rewarded.

Why compliance in compensation is crucial for your organization

Compliance in compensation structures means that you design remuneration in a legally correct, fair, transparent and risk-controlled manner. It may sound like a dry definition, but the practical implications are enormous. From January 1, 2025, the rules will become even stricter, with increased liability risks for both the company and individual directors. The financial impact of non-compliance can be far-reaching. Think of fines that can run into hundreds of thousands of euros, legal proceedings that can last for years, and remediation costs that far exceed the original problem. But the financial aspect is only one side of the story. The reputational damage resulting from compliance issues strikes at the heart of your employer brand. In a labor market where talent is scarce and employees are increasingly critical of employers, one compliance scandal can undo years of investment in employer branding. Current and potential employees closely watch how organizations handle compensation and fairness.

The function of compliance: more than following rules

Compliance fulfills three essential functions in your compensation structure. First, it provides risk management by identifying and minimizing legal and operational risks. This means not only that you comply with laws and regulations such as the Standards for Remuneration Act or collective labor agreement obligations, but also that you proactively identify risks before they become problems. Second, compliance creates transparency and trust. When employees understand how compensation is determined and can trust in the fairness of the system, it strengthens psychological safety within your organization. This is an aspect that Deepler works with extensively: organizations that score high on psychological safety often also have well-thought-out, transparent compensation structures. Third, compliance helps prevent perverse incentives. These are compensation elements that unintentionally encourage employees to engage in unethical behavior or take unacceptable risks. We saw this, for example, during the financial crisis, where bonus structures encouraged bankers to take excessive risks. However, the principle applies to every sector: if you only reward sales volume without weighing quality, you create an incentive for short-term thinking.

The three c’s of compliance in practice

In the compliance world, we often speak about the three C’s: Culture, Conduct and Consequences. Together, these three elements form the foundation of an effective compliance program for compensation structures. Culture is about creating an organizational culture in which compliant behavior is the norm. This means that compliance doesn’t only live within HR and Legal, but that every manager understands why certain compensation rules exist. It also means that leadership sets the right example. If management itself is creative with compensation rules, you cannot expect employees to follow the rules. Conduct concerns the actual behavior and processes around compensation. How are salary decisions made? Who has access to what? How are bonuses awarded? These are all moments when compliance becomes concrete. Establishing clear procedures and decision trees helps prevent arbitrariness and ensure fairness. Consequences concerns the results of non-compliance, both internally and externally. What happens if a manager violates the compensation rules? How do you deal with employees who deliberately try to manipulate the system? Having clear consequences that are actually applied strengthens the credibility of your compliance program.

The compliance file as foundation

A compliance file documents all aspects of your compensation structure and its compliance. This may sound like administrative hassle, but it is essential for several reasons. First, it offers protection during audits or legal proceedings. If you can demonstrate that you have acted carefully and documented everything, it significantly reduces your liability risk. Second, a good compliance file makes it possible to recognize patterns. Are there departments where deviations occur more frequently? Are there certain types of compensation agreements that regularly lead to questions? These insights help you continuously improve your compensation structure. The file should at least contain: all compensation arrangements and their legal basis, decision-making processes and responsibilities, deviations and their justification, periodic reviews and adjustments, and training and communication about compensation policy. Modern HR systems can automate much of this documentation, but the responsibility for the content remains with HR and management.

Implementation: from theory to practice

Setting up a compliant compensation system begins with a thorough analysis of your current situation. Where are the risks? Which regulations apply to your organization? This varies greatly by sector and organization size. A healthcare institution deals with different rules than an IT company, and a listed company with different ones than a family business. Next, it is essential to integrate compliance into your regular HR processes. This means that every salary round, every bonus award and every new compensation agreement is automatically tested against the compliance criteria. It should not be a separate exercise, but a natural part of your HR cycle. Training plays a crucial role. Managers who make salary decisions must understand what is and isn’t allowed, and why. This goes beyond an annual e-learning. It requires practice-oriented training with concrete cases from your own organization. What do you do if a top talent threatens to leave and asks for a salary above the internal range? How do you deal with equal pay for equal work when jobs are not exactly the same? Data and monitoring are indispensable for effective compliance. With the right HR analytics, you can identify patterns that indicate compliance issues. Think of unexplained salary differences between comparable positions, departments where deviations are approved remarkably often, or compensation elements that are not used as intended. Deepler’s platform can help with this by providing insight into what is really happening in your organization, including in the area of compensation perception.

The business case for compliance

Investing in compliance costs time and money, but the return on investment is significant. Organizations with strong compliance programs report fewer legal proceedings, lower insurance premiums, and higher employee satisfaction. They also attract talent more easily because they are seen as reliable employers. In addition, a compliant compensation system creates space for strategic HR. When the foundation is in order and you trust your processes, you can focus on the question of how compensation optimally contributes to your organizational goals. How do you stimulate the right behaviors? How do you retain top talent? How do you create a culture of performance and collaboration? The link with employee engagement is also direct. Employees who experience the compensation system as fair and transparent are more engaged and productive. They spend less energy comparing salaries or feeling shortchanged, and more on their work and development.

From compliance to competitive advantage

Compliance in compensation structures is not a destination, but a starting point. Organizations that see compliance as a minimum requirement miss the opportunity to turn it into a strategic advantage. By integrating compliance into your culture, processes and decision-making, you create a foundation for sustainable growth. The first step is mapping your current situation. Where do you stand now? Which risks are highest? What quick wins can be achieved? From there, you can develop a roadmap that improves compliance step by step, without overburdening the organization. Involve your employees in this process. Ask for their input on what works and what doesn’t in the current compensation system. This not only yields valuable insights, but also increases support for changes. Tools such as Deepler’s employee surveys can help quickly and effectively collect feedback on how employees experience the compensation system. Compliance in compensation structures is not a luxury, but a necessity that is becoming increasingly important. Organizations that invest in this now not only build protection against risks, but also lay the foundation for a healthy, performance-oriented culture in which employees feel fairly treated. That is ultimately the best investment you can make.