Critical Employee Compensation Metrics to Monitor

Labor expenditures are one of a business's largest expenses, accounting for 40-60% of its fund, according to
business services firm Deloitte. However, employee remuneration is not only a pricey line item in your
spreadsheet; it is also a critical component of attracting and retaining the personnel necessary to advance your
firm.

"You are a business with a strategic plan and objectives," Elliot Dinkin, President and CEO of business solutions
and consulting firm Cowden Associates, said. "The only way to execute and accomplish all of this is to surround
yourself with the proper people."

Finding and keeping the right employees, on the other hand, entails developing a pay philosophy and clear
strategy that are aligned with your business goal and include the appropriate compensation measures to
guarantee your policies are effective. Here's how to create a compensation strategy that supports your
organization's strategic objectives — while also meeting the demands of your firm and workers.
Philosophies and Policies Regarding Compensation
A company's compensation philosophy serves as the foundation for its pay policy and guides all of the
company's compensation choices, from base pay through CEO compensation. It guarantees that a company's
compensation methods are fair and consistent with the organization's requirements.

cording to the Society of Human Resource Management (SHRM, Human Resources should collaborate with the
senior leadership team to build a remuneration philosophy. They should analyze everything together, from the
business's funding to its strategic objectives and the market premium for the kind of personnel they want to
recruit and keep.

Compensation philosophies vary greatly and should reflect your business's identity, Dinkin recommended. "It
has to be consistent with who you are...[your] goal, vision, and strategic plan," he said. According to business
services firm KPMG, one organization may place a greater emphasis on incentive schemes, which reward
employees for meeting targets, than on basic pay. For another, measures to promote work-life balance may be
critical to its pay methods.
Metrics to Monitor
After establishing the foundation, you can build the compensation policies that will bring your reparation
theory to life. Compensation schemes may include the following specifics:
• Pay Structures: Specifies how businesses will reward employees in certain jobs.
• Variable Compensation: The additional compensation that employees may receive over and above their
regular wage dependent on their performance.
• Performance Ratings: Compiles information about employees' achievements and may be used to calculate
wage raises or other incentives.
Compensation metrics enable businesses to measure the effectiveness of their pay policies and standards. The
following are six indicators that a company needs to consider when conducting a compensation analysis.
1. Total Labor Costs
The overall cost of the labor adds up all of your employment and associated expenses. While labor is a
significant expense for the majority of firms, many executives are unaware of the amount they spend on their
employees. Jeff Higgins, the CEO of personnel analytics software solutions provider HCMI, says that since GAAP
accounting doesn't require the analysis, it's a measure that many organizations don't follow.

However, it is significant. "You cannot manage effectively what you cannot measure," Higgins emphasized. Pay
and benefits should be included in the computation. Some leaders also include the expense of running the
Human Resources division, he said. According to HCMI's website, costs associated with outsourcing jobs to gig
workers and other forms of freelancers, consultancies, and contingent, interim staff members should be
included as well.
2. Market-to-Price Ratio
Any pay plan should conduct a market analysis to ascertain the market rate for the company's target
personnel. In-house market research, websites like Glassdoor.com and the BLS, and data collected from
recruiters and new employees are all possible sources of information. Dinkin defined market-ratio as "present
pay divided by market equivalent." It is used to determine the competitiveness of a certain position in relation
to the market.
As an example, consider hiring a manager for $50,000 while the market rate is $55,000. Market-ratio would
only be $50,000/$55,000 (0.91) in this case.

"This does not imply that my compensation structure must exactly match the market; that would be
impossible; the market evolves too rapidly," Dinkin said. "However, I need to understand the market in order
to understand what my competitors are doing."
3. Salary Scale
The pay, or wage, range establishes the beginning and ending points for a job – its point of reference and
maximum. Within the salary range is the midpoint, which is the mean of the position's lowest and highest pay,
and is often regarded the market rate for the job. Understanding the salary range, along with the midpoint,
can help you determine compensation for new hiring or evaluate pay hikes for current workers.

["We] need a plan, a guidepost that will teach us how to work," Dinkin said. "Otherwise, we're simply winging
it, which isn't going to work."
4. Ratio of Compa-Ratio
The compa-ratio, also known as the comparison ratio, takes into account an employee's income and how it
compares to the midpoint of that salary or, more typically, the average market rate. Quantitatively, the
computation would be the employee's remuneration divided by the salary to which the employer is comparing
it, as follows: Salary/the salary's midpoint, for example.

"That's critical for a business to grasp, because if [we're] attempting to recruit and retain top personnel and are
falling short...[we've] got a problem," Dinkin said.

Another approach to look at compensation is via the lens of wage range penetration. It compares an
employee's compensation to the whole pay range for their job.

Salary minus pay zone minimum, then that amount divided by the differential of range's minimum and
maximum values. Finally, divide the result by 100 to get the percentage.

Thus, for someone earning $50,000 within a pay range of $45,000 to $55,000, salary range penetration would
be calculated as follows: ($50,000-$45,000)/($55,000-$45,000) x 100 = 50%.

With it, you can discover where the employee compensation sits within the pay parameters of their job – and
whether they’re near the bottom, in the center, or at the top.
5. Target Percentile
The targeted percentile is the quantity you’re prepared to spend to attract on the personnel that your
organization needs. Employees in the 50th percentile are often earning approximately the center of what’s
provided in the market — less than 50 percent of individuals in the same function and more than the rest with
the same work. The US Bureau of Labor Statistics includes figures for the 10th, 50th, 25th, 75th, as well as 90th
percentile.

As you examine your company’s employment requirements, the target percentile is critical. In order to attract
the best and brightest to a firm, it is necessary to provide a higher salary than the market rate; this is because
the best and brightest will want a higher salary than your ordinary employee in the same position. So that
company’s goal percentile to attract the ideal candidates may be the 75th percentile, Dinkin added. In other
words, 75 percent of workers in that function will earn less than what that business expects to provide.

Determining the appropriate percentile might take some sophisticated calculations. You may use calculators
like this one from Calculator Soup to help you figure out how much you're presently paying your existing
workers in the position and how the new, highly competent recruit will fit in. When six persons work in an
engineering profession, the 75th percentile salary would be $127,500 if two of them make $100,000, two of
them make $120,000, and one of them makes $150,000.

To attract in top talent, "It doesn't imply that every single position has to be at the 75th percentile," said
Dinkin. But if that's what my business strategy calls for, I have to put my business plan to work in that manner.
6. Internal Equity
Internal equity is a statistic used to quantify what persons in the same function are paid relative to employees
in comparable roles throughout an entire firm. As a result of this data, human resources (HR) experts should
endeavor to abolish the historical practice of paying certain employees less because they are female, black, or
any other protected class. Calculating internal equity helps organizations to detect and remedy unfair pay
practices and show that their pay policies are fair.

In Dinkin's words, "my pay methods cannot be discriminatory against a protected class." This is why it's
important for employers to be prepared to defend their wage practices in court.

In order to calculate internal equity, Amii Barnard-Bahn, a consultant for the Harvard Business Review,
recommends conducting audits every few years. Especially for larger-sized firms, she advocated engaging
auditors to assess the data, identify any concerns, and work on remediation. PEA, or pay equity audit, is a term
used to describe this kind of audit, and there are organizations and consultants who specialize in it.

As you delve into pay indicators, it’s crucial to realize that employee wages shouldn’t be your main focus as
you explore for methods to enhance staff engagement and retention. When it comes to business culture,
which is defined as the common beliefs and activities that bring workers together, John Millen of Millen Group,
an autonomous employee benefits consulting organization, believes that it is especially important right now,
as the COVID-19 epidemic continues to wreak havoc on the country. Decisions about work are no longer made
only on the basis of financial considerations. People want to settle where they feel respected. Said Millen:
“Wage is essential, but it’s may not be the most essential feature.”