August 1, 2023
It’s perhaps easy to understand that employee compensation has a Return on Investment (or ROI). After all, you pay your employees, they work for that pay, and their work delivers value when your company’s goods and services are sold for profit. Cause and Effect. ROI. Simple, right?
But what are some of the less obvious elements of the ROI for employee compensation? How can it be measured? And why (and how) should it be measured?
Let’s take a closer look:
Measuring Employee Compensation ROI
Various facets of the ROI of Employee Compensation can (and should) be measured. For example, beyond the obvious compensation cost-versus-profit aspect, factors such as employee turnover, replacement costs, and employee engagement are also important ROI measures. But why would a company want to measure the ROI of employee compensation in the first place, and why is competitive compensation important?
Simply put, measuring the ROI of employee compensation helps determine if your programs are working and are cost effective as designed, implemented, and managed. If you want your company to attract and retain top talent as well as to improve employee morale, competitive compensation is a must.
Is Your Employee Compensation Competitive?
To determine if your employee compensation program is competitive, answer these questions:
- Do you have trouble recruiting top-notch performers in your industry?
- Have you lost excellent employees to key competitors due to pay or other compensation components?
- Does your company suffer from poor productivity and low morale based on perceptions – right or wrong – that pay is too low?
- Are your incentive programs not driving desired employee productivity and behaviors?
- Do your top performers feel undervalued?
- Are company loyalty and commitment suffering among longer-term employees because they believe new hires are being paid more than they are despite their years of service?
Answering (and acting on) questions like these can provide intuitive insights into the overall health and ROI of your employee compensation programs.
How Can Employee Compensation Programs be Evaluated?
Certainly, it is important to regularly evaluate compensation programs to ensure they are effective and efficient. A less qualitative review can be done by answering these questions:
- Is your employee compensation program meeting the objectives established by management?
- How do you know? What are your metrics?
- Is the compensation program being administered according to employer policies and procedures?
- Can the plans withstand the risk of challenges from employees, government agencies, and other third parties?
- Is there an understanding of the roles and responsibilities between HR and line managers in the administration of employee compensation plans?
Qualitative reviews, on the other hand, can also be done through various metrics such as these:
Percent to Midpoint
This is a measure of each employee’s pay as a percent to midpoint. You can look at the average for the entire organization, by division, or by various employee groups such as non-exempt, professional, technical, management, etc. These metrics can help you see which groups are on average below or above your compensation philosophy and to be able to take action where needed.
Average Incentive Pay by Department
This metric will help you see which groups are getting the largest and smallest average incentive pay. This can help you determine if an area is known to be high-performing but is not getting a high level of incentive compensation – that something could be wrong with the program design within the incentive compensation program.
Average Merit Rating by Department
This can help management see the correlation between performance management and merit awards. It can also indicate if some managers are more generous in their ratings or award of merits than others.
Turnover and Retention Analyses
These analyses also help you evaluate compensation. For example, high turnover in a particular area might indicate a possible employee compensation issue. If you ask about compensation in exit interviews, that information can be helpful as well.
The Bottom Line:
It is important – essential, even – to consider and measure the ROI of employee compensation in your organization. It is also important, of course, to measure the right things; this can help you create a “compensation scorecard” to paint a picture for effective management of your compensation systems. A scorecard is a useful tool to benchmark progress on a regular basis and performance year over year. What you learn from the scorecard can help you adjust your employee compensation philosophies, programs, and practices – so you can remain competitive in your marketplace.
For help establishing compensation metrics, a compensation scorecard, and effective compensation systems, contact us today. We have the deep experience, professional expertise, and client focus to help you make the right moves. You can reach us at 317.589.8529.
Cassandra Faurote
About Total Reward Solutions:
Total Reward Solutions is your trusted partner for compensation services. Led by Cassandra Faurote, professionally certified Compensation and Human Resources expert and author of the book Compensation Sense 101, Total Reward Solutions offers a broad range of compensation and total rewards consulting services to help your organization attract top talent, motivate employees, and retain top performers. We can partner with you on a project basis, on retainer, or as your total outsourced solutions provider for compensation services.