Deer In The Headlights

Whenever I ask a client senior manager to describe the company’s Return On Investment (ROI) from their employee compensation programs they usually react with a blank stare.  Like a deer in the headlights.  Is that because the question is unique, or it's confusing or perhaps it's simply an issue they hadn’t considered before?  Perhaps no one has ever asked them.

Eventually though, if you wait long enough, they'll recover their glazed over look and stumble through an answer.  What they usually say is something related to employee turnover, that because not many employees are leaving their reward programs must be working "okay." 

If I push a little and ask how they maximize the value of their reward dollars, they'll hand me the good-old reduced merit increase budget story or perhaps reference a recent general adjustment or reduced payroll rise percentage. In other words, it's often painfully clear that they really don't have a handle on controlling their payroll costs. 

Unless prompted by more probing questions it's fairly common for senior managers to consider their compensation expense challenge as only the incremental cost of doing business.  Which 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.

However, if you compare your company’s total employee payroll against the impact of reducing the annual merit budget by even one full percentage, you'll see how far off the mark the respondent was.

I would submit to you that every dollar spent for employee labor is a compensation expense.  Using that premise a company's labor costs typically range from 40% to 60%  of their company's revenue (excluding benefits). That's a huge number, and playing with the cost of the annual pay rise pales by comparison.

Trying a different tact

When I ask that same client whether their compensation program is working for them, doing what it's intended for them, I usually get served back that same befuddled look.  Sometimes they actually resent the question.  How dare I!  Eventually though they'll 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, especially the mid-level variety, 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 the 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.  Is making the right pay decision supposed to be intuitive, like learning to operate a new Smartphone?  Often times these new managers fail to make decisions that are in the best interest of the company; theirs are 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 employee’s actual job performance.

The net result from these well-intentioned amateurs is a rising fixed expense of running the business - as illustrated by ever increasing payroll costs.

This can be a huge problem for any organization, but even with this stark reality it can be very difficult to get many in senior management to face the challenge.  Most are reluctant to take concrete and perhaps painful steps to gain more value from their payroll dollars, until they're finally led to understand what constitutes the controllable elements of employee cost - 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 is usually the company’s largest single expense item.

It can be done.  But not if you ignore it.  Not if you keep looking for that EASY button.

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.  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 clowder of cats.

Creative Commons image, Surprised! courtesy of Rockin' Rob

Comments

[Dan Walter]

Big Data. Predictive Analytics.

These are the terms that HR/Comp people must embrace before they are replaced.

You are right Chuck. Disappointingly few in the comp world can effectively discuss ROI. With effective data you can defend not only what you have, but what you really SHOULD have. Without it you are at the mercy of "market data", finance department assessments and a a downward spiral of influence and success.

[Joe Rice]

I'll fess my ignorance. So comp ROI is revenue divided by comp costs? We track SG&A as a % of Sales... pretty much the same? Does it have insight other than tracking the % over time?