Benefits and Compensation

Metrics—How to Know Your Comp System Is OK

How can you know if your comp program is meeting organization goals? You have to maintain metrics, says consultant Terry Pasteris, CCP, GRP. But there are metrics, and then there are metrics.

Why Are Compensation Metrics Important?

Pasteris, who is president of TLMP Consulting Group, offered her tips at a recent BLR®-sponsored webinar. She says that metrics help with the following:

  • Knowing whether you are succeeding in following your compensation philosophy. For example, say you want to pay at the 75th percentile of the marketplace. You have to measure to know if you are succeeding in doing that.
  • Identifying problems in your system, such as a high number of red circles or green circles.
  • Identifying potential discriminatory situations such as pay differentials for employees in protected classes.

What Are Compensation Metrics?

Metrics are measurements or statistics that are intended to assess value and effectiveness, says Pasteris.

Which metrics should you use? Start with the end in mind, says Pasteris. Establish how your organization defines success. Identify what statistics are monitored by your board and senior management.

For example, if management is concerned about overhead, you might want to calculate employee costs as a percentage of revenue or operating budget.

Meaningful Measurement

Revenue per employee is easy to calculate, but what does it mean? You need to reference your metric against something—some sort of baseline.

  • Measuring changes over time. Sometimes, you only find meaning by seeing changes over time.
  • Internal. Look at comp metrics about how you are operating internally, for example, measuring internal equity.
  • External. How do you relate to the outside market? (You may have several  approaches to this, says Pasteris. For example, your market for executive talent is probably quite different from your market for hourly workers.)

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Measures of Compensation Effectiveness—Some Examples

Some of the measures Pasteris has used include:

  • Revenue or expense per employee.
  • Compensation as a percent of revenue or expense.
  • Average FTE (full-time equivalent) compensation. (You don’t want to look like you’re underpaying when you are not.)
  • Base rate (doesn’t include differentials, overtime, bonuses).
  • Total (does include all pay).
  • Leverage (ratio of fixed to incentive pay).
  • Variable compensation as percent of revenue or profit. The hope would be that these go together. Looking at this metric is an enlightening experience, says Pasteris.

Metrics Contribute to the Bottom Line

One Pasteris client found that overtime was a big expense and that the rate the client was paying was significantly more than the market average. When they looked at the scheduling they found that the client could hire full-timers and eliminate most overtime. That’s a good example of a metric making a contribution to the bottom line, says Pasteris.

Payroll Metrics Problems

Two problems are common in looking at payroll metrics, suggests Pasteris.

First, looking at annual costs without annualizing. It is often important to control, for example, for new employees only there for part of the year.

Second, not considering eligibility. For example, if in the process of budgeting for merit, you determine that you need a 4% merit budget, that 4% of the base may be a number bigger than you need. Not all employees are eligible for merit; examples include union employees, per diems, and part-timers, or new hires not eligible for raises.

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Comparing to Market

When you go to compare to market using a survey, you’ll find that jobs are easiest to match at the top and the bottom, says Pasteris.

It’s harder in the middle of the organization where there’s a lot of variability in how companies organize. You need to take time matching. Consider job content, reporting relationships, and scope (geographic scope, budget, how many reports, etc.).

You want to be sure that you are comparing apples to apples, warns Pasteris.

In some cases, you may have to interpolate or add a differential. For example, if your intention is to pay at the 50th percentile, and your company is larger than the other companies in the survey, you might want to match to the 60th or 75th percentile instead of to the 50th. This is most common when:

  • Matching hybrid jobs. (Usually price to the highest skill level when jobs are a mix of high and low skill levels, Pasteris says.)
  • Matching new/emerging jobs.
  • There’s a match but expanded scope in your job.

Beware of title inflation—many companies awarded titles instead of cash during the recent recession, says Pasteris.

In tomorrow’s Advisor, Pasteris’s advice concerning the dangers of Green Circle employees, plus an introduction to the all-things-HR-in-one-place website,®.

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