Artificial intelligence, algorithms, and compensation strategy: Challenges and opportunities

Abstract

Compensation strategy plays a crucial role in attracting, motivating, and retaining strategic human capital. Amping up the advantages of being strategic about compensation are advances in technology such as cloud computing and storage along with digitized big data that make the sheer amount of information available and analyzed electronically, a huge competitive opportunity. The good news is these advances have unleashed a tsunami of technology solutions that promise to solve all compensation challenges. In this paper, I synthesize and summarize the literature on artificial intelligence and compensation management and describe four key challenges that companies face in using AI to manage compensation strategically. The first challenge is when and how to use AI to automate and augment compensation tasks and decisions. The second challenge is how to use AI effectively to improve fairness and equity in compensation practices. The third challenge is explaining how AI recommended changes in compensation practices are derived. The fourth challenge is how to actually be strategic using AI solutions. In describing these four challenges, I identify issues, opportunities, gaps, and current limitations of existing AI applications in supporting the strategic management of compensation in organizations.