“What are compensation metrics? Basically, when we talk about a metric, we’re talking about a measurement. We’re talking about a statistic or a measurement that is intended to assess value and effectiveness.” Terry Pasteris explained in a recent BLR webinar. “So, depending on what aspect of value or effectiveness or what aspect of our program we’re trying to evaluate, we need a different metric to help us determine if we are providing value and if we’re being effective.”
Why Are Compensation Metrics Important?
Compensation metrics are important because they help to assess how well compensation is meeting an organization’s needs. It can make the difference between knowing whether the compensation program is succeeding or failing. By measuring, you can see whether the organization is achieving its compensation goals.
But what should you measure? This is really the key question. To answer it, it’s always important to start with the end in mind. What this means is: How does your organization define success? What statistics are being monitored by your board and senior management? What outcome would be considered successful? Once you know the answers to these questions, it will be much more obvious to know what to measure.
For example, if your management is concerned with overhead costs, you may want to look at employee costs as a percentage of revenue or as a percentage of operating budget.
“You want to make sure that whatever is important in terms of your overall success as an organization, is also what you’re measuring in compensation.” Pasteris told us.
Compensation Metrics: Getting Started
After you determine how your organization defines success and thus what to measure, where do you begin? Just knowing what to measure isn’t enough—you’ve got to have a way to know what the figures mean.
For example, if you determine that your cost of payroll is 48 percent of your total revenue, is that good or bad? To know what to do with the figures, first you must establish a baseline. In some cases the baseline will be internal, and in other cases it will be external. You’ll want to measure changes over time after you’ve established the baseline so that you can track progress against goals.
Here are some measures of compensation effectiveness to get you started:
- Revenue or expense per employee
- Compensation as a percentage of revenue or of total expenses
- Average full-time-equivalent (FTE) compensation (both base and total)
- Overtime rates
- Variable compensation as percentage of revenue or profit
Naturally this list contains just a few suggestions; what is most relevant for you will depend on the circumstances in your organization.
For more information on compensation metrics, order the webinar recording of “Compensation Metrics: How to Gather and Calculate Key Data so You Can Pay Appropriately.” To register for a future webinar, visit http://store.blr.com/events/webinars.
Terry Pasteris is president of TLMP Consulting Group. She is both a Global Remuneration Professional (GRP) and a Certified Compensation Professional (CCP). Ms. Pasteris’ compensation work includes developing cash, benefit and equity programs and she has also developed performance management, staffing and communication solutions.