Measuring Compensation Effectiveness: Key Metrics for Success
Not everyone intuitively understands why measuring compensation effectiveness is so crucial to the health of an organization. When operations seem smooth, it’s easy to assume all is well beneath the surface. However, neglecting to track compensation effectiveness can lead to increased turnover, employee dissatisfaction, and recruitment struggles.
Whether your company appears to be functioning optimally, or you are constantly encountering challenges, ensuring an effective compensation strategy is essential. It’s the key to keeping your workforce engaged, competitive, and satisfied.
How To Measure Compensation Effectiveness With Reliable Metrics
1. Measure your company’s attractiveness to job seekers.
Salary is one of the most significant factors influencing job seekers’ decisions. While work/life balance and company culture matter, it’s compensation that gets candidates through the door.
To gauge how your compensation strategy compares to competitors, track the following metrics:
- Number of job offer rejections
- Percentage of rejections citing salary as the reason
- Time taken to fill an open position
Analyzing these data points can provide insights into whether your salary packages are competitive within your industry.
2. Keep track of your retention rates for current employees.
It’s important to get new hires in your door in a timely manner, but it’s even more important to keep them there.
You can measure how attractive your company is for current employees by tracking your turnover rate as well as the average duration people tend to stay in their jobs.
However, there could be any number of factors contributing to a high turnover rate, such as poor work/life balance or a stressful work environment. For this reason, you’ll want to perform exit interviews and track how frequently people cite salary as a primary reason for leaving.
If you frequently hear salary-related reasons such as, “I found a better paying position elsewhere,” or “I feel underpaid in this position,” you’ll know you have a comp problem to address.
It can help to track this metric for every individual position, as well as by department and for the company as a whole.
It’s worth noting that you might be able to prevent a high turnover rate by having these conversations with your employees before they get frustrated to the point of leaving. Send out an employee satisfaction survey from time to time, and make sure there’s at least one question asking whether employees feel they are fairly paid in their current roles.
You can also ask if employees are aware of the pay scale for comparable positions at other companies, and ask them to give an estimate of where they fall on that range.
If respondents seem to frequently answer that they feel underpaid compared to what their peers are making in other companies (even if their estimates are way off), this could signal a problem. At the very least, it opens the door for a productive conversation where you can explain what the competitive salary range for their position actually is and work together to come up with a game plan to help these folks feel more satisfied with their pay.
3. Compare your offered salaries against the wider market.
It’s one thing to address how employees feel about what they’re being paid, but it’s equally important to run the numbers behind the scenes and make sure your salary ranges are where they should be from an objective standpoint.
To begin with, you can compare what each person in your company is making against people in comparable positions at other companies within your area.
In some cases, this will be relatively easy. You’re likely to find parallel positions within similar companies, so the comparisons will be straightforward.
In other cases, however, you might be trying to price a “unicorn,” meaning you’ve got a position that doesn’t quite match up in job title, scope, responsibilities, or pay to anything else in your slice of the market. If your company has a lot of unicorn job titles, you may find that it’s unnecessarily hard to find a reliable compensation strategy because your market comparisons are getting thrown off by the uniqueness of all your positions. This can signal that it’s time to realign or restructure the job titles and duties within your organization.
4. Compare positions within your own company.
We’ve all heard the news stories about “fat cat” CEOs making millions upon millions every year while their employees scrape by, barely making ends meet. That situation is a PR nightmare that can lead to dissatisfied employees, unhappy shareholders, and a tarnished public opinion of your company.
We advise comparing executive vs. non-executive salaries to keep your compensation levels in balance. Don’t forget to look at executive commissions, bonuses, and stock equity in addition to salary, as these factors can make a big difference in your final numbers.
Remember that often what seems fair on the surface actually isn’t as fair when you look a little bit deeper.
If you apply a flat 4% raise to everyone in your company, that sounds great. However, if you’ve got some people making $100,000 and others making $50,000, you’ve actually just increased the disparity between those positions by opting for a blanket percentage raise.
While you’re running these numbers, you can also compare other categories, such as commercial vs. non-commercial (those who get bonuses, tips, and commissions and those who receive fixed hourly wages or salaries) and employees who have access to overtime vs. those who don’t.
Within the last category, you’ll want to be able to answer the following questions:
- Are all employees equally able to take advantage of overtime opportunities?
- Are some employees overburdened, perhaps taking on too much overtime and getting burned out?
- Do employees feel forced to take overtime, whether it’s because they think it’s required or simply to make ends meet?
When comparing positions against each other, look into some of the potential reasons one particular employee might be making more or less than someone else before you decide whether the pay for that role is fair or not.
Keep the following in mind:
- Some people may have spent far longer with the company than others.
- Some people pursue continuing education frequently while others tend to coast for a while.
- One person may have worked in the field (even if it was at another company) for a decade, while someone else just switched to a new career and lacks the same depth of experience.
Finally, look for racial, gender, or other demographic disparities that may send up a red flag that someone isn’t making what they should be compared to the rest of your staff.
5. Compare each person’s pay against itself over time.
No one wants to begin a new job and then receive stagnant pay for years on end. However, continuing education, promotions, and scope changes aren’t always reflected in a person’s pay when they should be. Conversely, someone’s pay might inflate alongside everyone else’s when that person doesn’t necessarily perform well enough to justify such increases.
Keep your employees’ pay on track by measuring:
- How long each person has been in their position
- The certifications, training, and continuing education each person has received
- Each employee’s job performance over time
- How much each person’s pay has changed due to the above factors
How on earth do you keep track of all these metrics? Keep it simple with SimplyMerit.
If you were to try to manually track everything we’ve discussed here using a spreadsheet, you’d never have time for anything else. The second an employee received a promotion, underwent training, switched to a new position, or got a performance evaluation, you’d have to make those updates by hand and then run your numbers all over again.
It’s no wonder most HR professionals get overwhelmed trying to stay on top of changes within their organizations.
SimplyMerit makes it easy to track custom metrics automatically and make informed decisions, even when circumstances are constantly shifting. It also gives you a ready-made data set to hand to your executive team when they ask why you’ve proposed certain changes.
No matter what your company’s philosophy is—whether you want to prioritize your extra revenue for underpaid but high-performing employees, set aside a percentage of the budget for staff training, or something else entirely—SimplyMerit allows you to be sure your dollars are going exactly where they need to go. Just ask our SimplyMerit customers what a difference dedicated compensation management software has made in their lives.
Contact MorganHR with questions, or get started right away!
