Compensation Metrics HR Managers Need to Know

Employee compensation should be on the mind of all employers. It’s a huge expense to budget for, and it’s a key recruiting tool. The right talent is what keeps a company moving forward. You want to ensure you’re attracting and retaining the best of the best.

To do so, you need a comprehensive compensation plan. HR managers want to align employee needs with the organization’s strategic goals. They should ensure equitable practices and market competitiveness. Compensation metrics can help gain the necessary insights to do this.

Your Organization’s Compensation Plan

To make fair and calculated compensation decisions, you need a plan. A compensation philosophy will help drive anything from entry-level base pay to executive compensation. Ultimately, the decisions you’re making should be equitable, aligned with company objectives, and data-driven.

Determining how you’ll pay your employees depends on several things. What is your company’s budget? What is the market rate within your industry and company size? What values drive your pay practices? Once you’ve answered these questions, you can determine your approach.

Over time, it’s important to monitor how effective your pay practices are. Compensation metrics are tools used to measure and analyze policies and practices to help you improve them. They measure monetary and non-monetary elements, helping you identify what’s working and what needs adjusting.

Here are six metrics that HR managers need to know and track in their compensation analyses.

1. Total Compensation Spend

Total compensation spend is a metric that measures what percentage of your organization’s total budget you’re allocating to employee compensation. This is a crucial number because it is usually the biggest expense for a business. Deloitte found that, on average, labor costs account for 40-60% of company expenses.

Total spending includes all elements of compensation, including base pay, bonuses, and benefits. As such, it can help HR managers completely assess the total cost of recruiting, helping them budget properly and attract top talent.

2. Market Ratio

This metric compares your organization’s average salary to market pay rates for similar roles in the industry or location. Market ratios can help HR managers determine how competitive the compensation packages you’re offering are. You don’t want to lose talent to the external market because you’re not offering enough. This requires tracking industry trends and shifts.

3. Pay Range

Pay ranges help HR managers see salary bands ranging from minimum to maximum in the organization. They can ensure that the company is compliant with minimum wage laws and regulations. It helps to measure how competitive the compensation packages are relevant to market averages. The pay range metric will also help HR managers control costs to meet budget goals.

4. Comparison Ratio

The compensation ratio considers where an employee’s actual salary falls compared to the midpoint of the pay range for their role. This metric helps HR managers see whether employees are being paid at the bottom of the range, in the middle, or at the top. It’s important to review these regularly, for reasons including external competitiveness and internal equity. It can guide promotions and bonuses for top performers or long tenure.

5. Target Percentile

HR managers use this metric in benchmarking to determine the desired percentile at which your organization pays relative to the market. That is, workers in the 50^th percentile are earning in the middle of what’s on offer in the market. Target percentiles help HR managers assess how the organization’s compensation practices align with the external market. This directly ties into recruiting. For example, if you need to hire top talent with specific skills, the role may have a higher target percentile.

6. Internal Equity

One of the most important metrics is internal equity. This tracks how consistent and fair the pay levels within the organization are between one person and another in the same role. Employees should be earning equal pay for equal work, regardless of protected characteristics. This way, HR managers can identify any concerning practices or gaps and correct them. Not only is this an ethical concern but also a legal one.

Making Smart Compensation Decisions

By utilizing compensation metrics, your organization can make smart, data-driven decisions. This way, HR managers can ensure that the organization’s compensation practices align with business objectives and offer fair and equitable opportunities, all within the allocated budget. Your company can remain competitive, ensuring you don’t miss out on top talent.