A strategic risk HR can’t ignore

When most people think of risk management, they picture cybersecurity threats, supply chain disruptions, or compliance issues — not the compensation programs used to attract, engage and retain a company’s workforce. But compensation, especially for privately owned companies, sits squarely at the intersection of operational, financial, and reputational risks.

From an enterprise risk management (ERM) perspective, HR leaders should see compensation not just as a tactical function of their areas of responsibility, but as a potential source of risk — and a huge opportunity for strategic impact.

Compensation touches everything related to talent management: company culture, attraction, retention and financial health. If your compensation practices are outdated, misaligned, or noncompliant, you're not just risking increasingly low levels of employee engagement, but you could be setting the stage for legal trouble, turnover spikes or budget volatility. In ERM terms, compensation is a risk that often flies under the radar until something breaks. That’s why a compensation risk assessment should be on every HR leader’s radar — not as a “compliance box” to check, but as a critical input to your overall risk management strategy.

Understanding compensation through a risk lens

Assessing compensation risks

Potential areas of risk	Potential impacts
Financial	Overly generous incentives could strain budgets or affect profitability.
Talent	Underpaying top performers can lead to high turnover or disengagement.
Regulatory	Non-compliance with pay transparency laws or deferred compensation regulations.
Compliance	Paying bonuses without meeting performance thresholds or proper delegated approvals.
Reputational	Executives receiving large pay from prior periods amid layoffs or poor performance.
Operational	Incorrect bonus calculations due to outdated or misconfigured HR software.

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Turning risk awareness into action

Conducting a compensation risk assessment is your chance to be proactive. You’re not waiting for a fine, an audit or a talent exodus to tell you something’s wrong. Instead, you’re digging into the data, assessing vulnerabilities, and building a framework that supports smart, risk-aware decision-making.

This means looking closely at how compensation plans and programs are designed and structured, how decisions are made and how outcomes are tracked. Are your salary bands current and market-aligned? Do your incentive plans support the company’s risk appetite and long-term goals? Are pay decisions documented and explainable? If the answer to any of those questions is “I’m not sure,” that’s exactly the kind of ambiguity compensation risk assessments are designed to resolve.

The best part? This isn’t just about minimizing downside. When done well, a compensation risk assessment becomes a strategic tool. It helps your company attract the right talent, mitigate risks, control costs more predictably and build a culture of fairness and transparency. It puts HR in the driver’s seat — not just supporting the business but actively shaping its resilience and success.