How Much, You Say?

Whenever  I ask a client to explain their company's ROI from employee compensation, from paying their employees, they always seem to react with a blank stare.  Is that because the question is unique, confusing or simply an issue they hadn't considered before?  Perhaps no one has ever asked them.

Eventually though, they will stumble through an answer.  What do they usually say?  Something about turnover, that not many people are leaving, so things must be working okay.  If I push a little, they will hand me the good-old reduced merit increase story or perhaps quote a recent general adjustment or lower payroll rise percentage.  Unless prompted by more probing questions it is fairly common for senior managers to consider their compensation expense challenge as only the incremental cost of doing business.

This means that when it comes to the matter of monitoring or controlling such costs the "pool" of money under discussion is only the annual increase budget.

If you compare your company's employee payroll against the impact of reducing the annual merit budget by even one full percentage, you will see just how far off the mark the respondent was.

However, I would submit to you that every dollar spent for employee labor is a compensation expense.  Using that premise a company's labor costs will balloon to over 50% of their revenue (excluding benefits).  In that environment the cost of the annual pay rise pales by comparison.

Trying a different tact

When I ask that client whether their compensation program is working for them, I usually get served back that same befuddled look.  Eventually they will again bring up their turnover statistics, as if somehow that percentage (if being used as a metric in the first place) has a 1:1 correlation to compensation program success.

It doesn't.

Managers are commonly ill-equipped to understand the dynamics of their compensation costs, never mind monitor and control them.  This is not surprising though, given that their cadre of newly minted managers are routinely given authority to spend the company's money (hiring, promotion, pay rises, etc.) without the benefit of any managerial training.  Often time these new managers don't make decisions in the best interest of the company, but more commonly on the basis of subjective emotions, a desire to be liked, an exercise in personal power or for a host of other reasons that may or may not relate to an individual's actual job performance.

Of course, the net result from these well-intentioned amateurs is a rising fixed expense of running the business - in the form of uncontrolled payroll costs.

This can be a huge problem for any organization, but you won't get management to face the challenge and take the concrete and perhaps painful steps to improve until they are finally  led to understand what constitutes the controllable employee cost of operating the business - and how to impact that expense.

Ignorance of the law is not a valid defense, I'm told.  Perhaps we should challenge our leadership, our management, to actually manage what could be the company's single largest expense item.

It can be done.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  With over 30 years Rewards experience Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats. 

Image: Creative Commons photo by tao_zhyn

Comments

[Joe Brown]

Great post, Chuck. I was most struck by your comment that "Managers are commonly ill-equipped to understand the dynamics of their compensation costs, never mind monitor and control them." This is at the heart of a challenge that I have faced repeatedly in working with organizations to overhaul and improve their compensation practices. Not only do managers generally lack these abilities, but I would suggest that there is no reasonable expectation or need for the majority of managers to develop them.

I believe it is a mistake to push responsibility for compensation decision-making too far down in the organization. You accurately described the potential results of poor or subjective decisions in terms of uncontrolled payroll costs, and this is certainly true. However, there are potentially other prices to be paid, in the form of perceived or real inequity in reward practices and inconsistent linkage of compensation and performance among different employees. Such inequity and inconsistency can negatively impact morale, trust, engagement, and turnover, resulting in higher recruiting, onboarding, and related costs and, therefore, even greater degradation of the ROI on compensation.

I am currently working with an organization whose practice has been to provide individual managers with merit and bonus pools to be allocated as they see fit. Beyond establishing the size of each manager's pool (in a problematic fashion, but I digress), senior management and the human resources function exercise virtually no control over how and on what basis increases and bonuses are distributed. With my efforts to refine the organizations compensation practices and pay-for-performance orientation, the free reign currently provided to managers is becoming a thing of the past. Mangers will instead be focused with managing, supporting, and evaluating performance, with the linkage to compensation -- and thus the resultant costs -- managed centrally. Among the effects will be greater equity and consistency across the employee population. Rather than resisting the change and perceiving it as a reduction of their power, managers in this particular organization actually welcome the change and feel that it will relieve them of burdensome responsibility and often unpopular decisions and will free them to focus on optimal performance of their staff and their units.