The right employee compensation metrics can help you measure compensation effectiveness, making it easier to identify waste, remain competitive, and thrive.
Tracking and evaluating employee compensation metrics matters for maintaining a healthy, viable company. A company’s compensation philosophy plays into the quality of employees it keeps, how difficult retention will be, and how much competition it will face for talent.
Understanding total compensation is essential. For example, the U.S. Bureau of Labor Statistics recently reported wages and salaries cost employers 69% of total compensation expenses. Benefits accounted for 31%.¹ Why is this the current compensation trend, and is that split effective for everyone?
Measuring your compensation plan’s success provides insight to where your company stands compared to others. It can also help shape what types of compensation conversations to conduct with your employees. Let’s look at what compensation metrics are and which ones might best apply to your company’s compensation strategy.
What are compensation metrics, and why are they important to measure?
A compensation metric, also called a compensation scorecard, is a numerical figure calculated from aspects of your company’s compensation practices. These metrics, or compensation scorecards, help companies understand their pay structure, compare it within the market, and pinpoint potential compensation issues.
Compensation analysis is necessary to:
- Ensure every employee is paid fairly.
- Manage compensation to improve employee retention.
- Establish appropriate pay ranges.
- Stay competitive with the market rate.
Relevant and consequential compensation metrics employers should track and evaluate
There are many ways to slice and dice employee pay for a review. Here are several that offer insight employers can use to measure and improve company compensation.
This metric sets the boundaries for acceptable compensation for a particular position. Salary ranges help employers set base pay for new hires and determine salary increases for current team members.
This number is the lowest pay in the pay range and the least compensation you would pay for a particular position.
The maximum range is the maximum salary you would extend an employee for a particular position. This pay rate is typically reserved for top-tier talent.
You can calculate the midpoint by averaging a position’s minimum and maximum range together. This range midpoint is usually considered the job’s market value.
Pay range spread
Using salary midpoints, you can calculate the pay range spread, which highlights opportunities for salary growth within that pay range. You’ll typically see more narrow ranges for lower-level jobs and wider ranges for higher-level jobs.
Metrics involving salary bands
Salary bands reflect the average salary for each job. These metrics quickly determine who is over, under, and in line with the salary bands. Good salary band adherence means the company is keeping compensation in line with the target.
- Percentage of employees below salary band: Figure this percentage by dividing the total number of employees by the number of employees under the salary band, then divide that total into 100. The higher this number, the more likely a company will have to deal with employee turnover.
- Percentage of employees over salary band: This metric can be figured similarly to the one above. A high percentage of employees over the salary band means many have exceeded the pay range. The range may need to increase, or some of these employees may need to move into new roles.
How you compensate your employees in relation to market rates is your company’s target percentile. If it’s 50 or higher, your company is leading the market. If it’s lower than 50, your company is lagging behind the market.
This metric lets you evaluate the progression from the midpoint salary of one level of job to another.
Average promotional increase
Looking at pay increases gives a company insight into its overall pay practices. This metric highlights the average raise given for a job promotion. Companies on tight budgets shouldn’t shy away from this, as alternatives exist for those who can’t afford raises and promotions yet.
Compensation ratio (compa ratio)
A compa ratio lets companies compare where individual employees are in relation to the salary range midpoint. Using this metric helps companies identify issues with internal equity.
Salary range penetration
This metric compares a salary to the entire pay range and establishes where each employee stands regarding compensation. This comparison helps companies determine if their pay ranges are too wide or too narrow. If they’re too wide, compensation is all over the place. Too narrow means that everyone, regardless of tenure or performance, makes close to the same compensation. Either extreme could present a problem for all involved. But if the range penetration metric is ignored, its status and adverse effects could easily be overlooked.
Companies can compare their pay rate to the market pay rate for the same job with a market ratio. This metric helps evaluate how close your company is paying to where it’s targeting to pay.
Annual benefit spend change
When reviewing metrics on how you pay employees, remember to look at employee benefits, too. After all, they can be a sizable chunk of the total compensation. The annual benefit spend change is a percentage that represents the total spent for benefits in the current year compared to the previous year. This metric helps employers keep a close eye on rising benefits costs.
Compensation revenue factor
Paying employees is usually one of a business’s largest expenses. This metric looks at total employee compensation compared to company revenue.
Use key compensation metrics for business success
By keeping a pulse on your compensation effectiveness, you broaden your view of, and influence on, the bigger picture. The right compensation metrics can help you identify waste, remain competitive, and retain employees who shape organizational growth and prosperity.
You may not need to review every metric listed here, as your most useful compensation data may vary. The key is to strategically choose the metrics most relevant to your business strategies, goals, and challenges. Used well, the time and attention will be worth the effort. Intelligent compensation planning and oversight are instrumental in creating a productive, high-functioning company with happy, engaged staff.
For help constructing your company’s employee compensation packages, follow our guide on how to create your company’s compensation plan.