How to Measure Compensation and Benefits

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Part 4

• How to Measure Compensation and Benefits

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Trends

• There have been significant changes in the
  operating environment that organizations faced
  during the last few years.
• Very few companies have escaped the need to
  downsize the workforce to meet the demand for
  efficiency and cost reduction.
• Simultaneously, the increasing rate of
  technological change and the greater emphasis on
  quality and customer service require repeated
  upgrading of employee skills.
• As skills grow and promotions are made, there is
  an expectation of increased salaries and bonuses.
• All this is occurring at a time, when cultural
  values in many organizations are changing from
  the traditional management-worker role to a more
  flexible type of structure, that encourages
  teamwork and increased employee involvement.

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CompensationPayBenefits

• Compensation can be thought of as the total
  package pay plus benefits.
• Benefits are important but secondary part of the
  total compensation program. For the most part
  they need to be competitive, but having the best
  package will not guarantee that anyone will want
  to work for the company.
• Benefits change as the workforce and the family
  change and as the government responds to that
  changes.
• Management uses benefits to shield the worker
  from catastrophic health problems as well as to
  promote fitness, provide recreation and offer
  security.
• In unusual times new benefits appear to help
  companies attract or retain talent.

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The Total Package

• Effective compensation practices are specific to
  the organization the values and ethics of the
  organization drive them.
• In establishing compensation programs
• the CEO and managements philosophy in regard to
  value of people,
• the ability to pay,
• competitive position, and
• the business structure and focus,
• plus other factors
• comes into play.
• It is not going to get easier, and a measurement
  system is essential to knowing where the value is
  coming from and rewarding it accordingly.

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Compensations Challenge

• The compensation system (department) attempt to
  fulfill its role of assisting in attracting,
  retaining and motivating employees by doing the
  following
• It builds a system of performance management and
  pay that suits the evolving needs of the
  organization.
• It controls the cost of pay program not just by
  monitoring the cost in monetary terms, but also
  influencing how managers use the program.
• It tries to communicate the pay and performance
  management system to the employees so that they
  will understand how and why it works the way it
  does.
• It strives to convince employees, by monitoring
  management pay practices, that the system is
  just, equitable and competitive.
• The way to judge the compensation departments
  productivity or effectiveness is to look at each
  of the focal activities mentioned.

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Cost Analysis

• In most organizations payroll costs are the
  largest or the second largest single expense
  item.
• The two most common calculations are total cost
  of payroll and average salary cost per employee.
• This measure can be shown by exempt, nonexempt
  employees or equal opportunity groups and also
  for contingent employees. This latter measure is
  very useful in determination to hire contingent
  versus regular employees.

• where
• ECF employee cost factor
• TC total compensation
• FTE number of full time equivalents (instead of
  number of employees!!!)

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Payroll Tax Factor

• Variations on the basic measure are also useful.
  An often overlooked cost item is payroll taxes.
• NOTE an organization not only pays its
  employees salary, it also pays a significant
  amount of money to the state.
• Both the magnitude and the rate of growth of this
  expense item have become critical operating
  concerns for management.

• where
• PTF payroll tax factor
• TC total compensation
• PT sum of payroll tax reductions
• social security (health pension)
• income taxes
• other contributes unemployment, employers,
  vocational training, etc.

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Management Reporting

• Managements attention is focused on strategic,
  organizational level data, so HR should show how
  pay relates to other expenses as well as to
  sales, number of employees, benefits.
• These variables are basics of a business. One
  benchmark that many firms monitor is employees
  and revenues.
• Dividing total revenue by total number of
  employees, we obtain a number that management
  usually track as a marker of efficiency.

• where
• RF revenue factor
• TR total organizational revenue
• FTE number of full time equivalents

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Management Reporting

• A second measure that further defines
  productivity is income per employee, or income
  factor (IF).
• This measure illustrates the monetary income or
  profit generated per full-time equivalent and
  provides an integrated picture of productivity
  and expense control efforts.
• A similar measure of cost and efficiency is the
  employee hourly cost factor (EHF). This measure
  provides a finer screen of labor costs.

• TR total organizational revenue
• TE total operating expenses

• P total wages and salaries paid
• EHW total employee hours worked times number of
  employees

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Management Reporting

• We have looked at cost from several perspectives.
  The last one is the cost by function. The
  workforce can be divided into many groups, such
  as job level, job group, department and location.
• This is not new. But only a few people consider
  what it cost to manage an organization. To make
  this visible, will compute the cost to manage.
• Our definition of management includes everybody
  from the first line supervisor to the CEO. All
  this people exist in the organization, yet they
  are not producers. Their job is to manage the
  work of others. To find out how much that service
  costs, we present you two measures.

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Management Reporting

• The first measure is management investment factor
  (MF), which shows total management cost per
  employee.
• The second, management cost factor (MCF), shows
  the average managers pay.

• MC total management compensation
• FTE number of full time equivalents

• MC total management compensation
• M/FTE number of manager employees (full time
  equivalents)

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Employees Pay Attitudes

• Tangential to the pay system and its utilization
  is the reaction of employees to their pay.
• Since behavior is based largely on perceptions of
  the environment and since pay is a perceptual
  field, it follows that employees view of their
  pay must correlate with some aspects of work
  behavior.
• What has not been proved is exactly how, when and
  how much attitudes affect behavior on the job.
• Money is important, because
• it is a general means to satisfy needs,
• it is a basic incentive,
• it keeps workers from being dissatisfied but does
  not motivate them,
• it is an instrument to attain a valued goal
• it is not the primary reason people stay or leave.

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The Strategic View

• So at organization level we should point our
  management reports toward two issues expense
  trends and correlation to performance.
• Presenting this type of data on a regular basis
  causes the compensation manager (HR manager) to
  be viewed as someone who transcends
  administration. He/she becomes part of the
  executive team that manages the
  cost-effectiveness of human capital.
• The formulas used to calculate these data are
  shown on the next slides, followed by a summing
  of the two basic formulas.

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The Strategic View

• Compensation Expense Percent (CE)
• Benefit Expense Percent (BE)
• Total Compensation Expense Percent (TCE)

• where
• TC total wages and salaries paid
• TE total operating expenses

• where
• TB total cost of all benefit programs,
  employees share only
• TE total operating expenses

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The Strategic View

• In choosing one measure over another for
  reporting to the management, it is important to
  select metrics that represent managements
  concern and interest.
• If the organization is focused on controlling
  costs, the compensation expense metrics are
  important.
• If the focus is on sales and revenues, it is
  better to report compensation as a percentage of
  revenue. The basic measures are almost the same
  as in the previous case, we present only the
  compensation revenue percent (CR)

• where
• TC total wages and salaries paid
• TR total organization revenue

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The Strategic View

• A third strategic compensation issue is the
  return on investment of incentive plans.
• Sales personnel have long worked on incentives.
  When used consequently, incentives can be very
  powerful. There is a fast-growing trend to put
  more pay at risk in positions other than sales,
  and this has become a key component in many
  salary plans.
• A simple way to measure the cost of at-risk pay
  is shown below as variable compensation percent
  (VC)

• TV total variable pay, includes pay in addition
  to regular pay and not given on a regular basis,
  e.g. overtime, premiums, performance bonuses,
  profit sharing
• TC total wages and salaries paid

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Summary (Compensation)

• Compensation management is like overseeing an oil
  pipeline. It is a continuous, seemingly endless
  flow with a few interruptions to repair leaks.
  There are some checkpoints to determine how we
  are doing.
• In the light of the shortage of talent and the
  constant drive for competitive advantage, we
  suggest shifting the focus of measurement from
  system maintenance to strategic effectiveness
  perspective.
• NOTE based on exit interview service results,
  people often cite poor pay administration as a
  reason for leaving. They are more concerned with
  the equity and timeliness of pay than with the
  amount.
• Pay is one of the three most important issues for
  every employee. The other two are the work itself
  and relationships at work.

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Benefits

• Benefits are a phenomenon of the second half of
  the twentieth century. Today compensation reports
  show, that in the US benefits commonly amount to
  30 to 40 percent of salary, depending on the
  industry. (HUN 15-25)
• Before 1990s employees developed an expectation
  that the organization had to do more than pay
  them a salary (HUN it is especially true when we
  think of socialist companies). The company also
  had to
• provide a security blanket in the form of health
  and life insurance,
• establish some sort of retirement security,
• pay tuition assistance or otherwise invest in
  employee skills and knowledge.

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Benefits Role

• The purpose of a benefit program is to augment
  the salary program in an attempt to attract,
  retain and provide incentive for employees.
• The question is How can we tell if the benefit
  system operates efficiently and effectively?
• By nature, benefits probably help attract and
  sometimes retain employees, but are not the
  primarily reason for most people to join an
  organization and never have been proved to
  stimulate performance.
• Benefits play a background role. They are there
  when an employee needs them, and when they are
  not in use, they tend to be forgotten.
• The job of HR is to make sure that they are
  accessible and able to provide a satisfactory
  solution.

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Total Cost of Benefits

• Most of the times we consider only the direct
  expenses associated with the benefit programs, as
• insurance premiums,
• vacation, holiday and sick leave pays,
• tuition reimbursement,
• profit sharing,
• recreation programs,
• discounts on employers goods or services,
• separation pay and moving expenses,
• service and suggestion awards, etc.
• When all numbers are combined, the sum can be
  impressive, but it only part of expenses
  associated with benefits. Indirect costs, like
  staff costs, overhead costs and computer costs
  (if applicable) are also necessary to maintain
  the benefit programs.

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Measures of Benefit Cost

• Benefit Factor (BF)
• Total Benefit Cost (TBC)
• Total Benefit Factor (TBF)
• Benefit Compensation Percent (BCP)

• TB total cost of all benefit programs,
  employees share only
• THE total headcount employees
• ST cost of staff time
• OH overhead cost
• PC processing cost
• PP plan payments
• Misc other expenses
• TC total wages and salaries

TB
BF
THE
TBC STOHPCPPMisc.
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Participation Patterns

• Generally benefit packages offer employees some
  choices. The usage rates of the selective package
  items are probably the best data source for HR
  managers.
• The percentage of participation (usage rate) can
  be computed for a given benefit item across
  different groups of employees. This type of
  analysis yields patterns that could help design
  or redesign the benefit package for a most
  cost-effective system.
• The main problem with usage patterns is employee
  misunderstanding. Plans and options can be so
  complicated that many people have trouble making
  the right choice. For most this is a trial and
  error.

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Communication

• Because of the chance of misunderstanding and the
  fact that benefits quickly fade into the
  background in the mind of the employee,
  communication is important.
• People always know how much their salaries are
  and know exactly when they are due for the next
  increase, but they usually forget about the
  benefit package until they need to use part of
  it.
• As a result, the organization does not receive a
  very healthy return on its considerable
  investment on benefits (low ROI).
• To improve the situation, the HR manager needs to
  develop an active communications program, using
  all possible means of communication
• orientation program as a first opportunity,
  brochures, articles in the employee newspaper,
  information meetings, etc.

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Summary (Benefits)

• Generally organizations spend a considerable
  amount of money on benefits. On this topic
  management finds itself pulled in two opposite
  direction
• on one side there is a strong push to expand the
  private sectors involvement in benefits
• on the opposite side is the drive to control
  costs to stay competitive on the market.
• HR managers responsibility is to show the top
  executives how the organization can improve its
  returns on benefits.
• If we change our mental image of benefits from a
  cost to a return on investment, we probably find
  new ways to make benefits worthwhile for the
  organization as well as the employee.

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C o f f e e b r e a k