Get your employee compensation right, and you can attract and retain the best talent, boost productivity and ultimately become a more profitable organisation.
But get it wrong, and you could be facing staff shortages, out-of-control attrition and widespread disengagement. And that’s not the worst part. If you’re not keeping an eye on your internal pay equity, you could even find yourself facing legal trouble down the line.
Here’s the thing, though: you can’t improve what you can’t see.
That means if you want to make sure the salaries you’re paying are fair, competitive, and in line with your organisation’s strategy, you need to be tracking key compensation metrics in 2024.
Otherwise, you might not realise you have a problem until it’s way, way too late.
But don’t panic! By the end of this article, you’ll be equipped with five key compensation metrics to start tracking this year, setting you on the path to compensation success.
(Psst! Keep reading to the end to find out how Figures can help you keep your compensation competitive and fair.)
The importance of tracking compensation metrics
Tracking compensation metrics allows you to ensure your compensation structure supports your organisation’s overall goals. It gives you a strategic advantage by aligning your pay to the reality of the market, helping you to attract the people you need to drive growth in your business.
Plus, tracking these metrics can help you to measure pay equity and fairness within your organisation — something that’s on all of our minds at the moment. Put simply, tracking compensation metrics lets you find out if your compensation strategy is working — and fix it if it’s not.
5 compensation metrics to track in 2024
The number of compensation metrics you could be tracking is basically endless. As long as you have the right data, there are a million ways you could break it down.
But no one has time to track every single aspect of their compensation strategy. So we’ve narrowed it down to five of the most important compensation metrics (plus one bonus one) that we think you should be tracking in 2024.
1. Total cost of workforce (TCOW)
Your total cost of workforce (TCOW) is the amount that you spend on your employees over the year. It includes base salaries, variable pay, benefits and employer taxes and contributions. Some companies also include things like the operational costs of running HR and payroll.
It can also be useful to break your TCOW down into two buckets: fixed and variable costs. This allows you to differentiate between the amount required to keep the company running, and the cost of growth.
Measuring your TCOW allows you to track costs over time, and spot any increases or decreases — helping you to make sure that your pay practices are still in line with your compensation philosophy.
Compa-ratio is a metric that compares an employee’s salary to a particular figure, usually the midpoint of their salary range. It’s expressed as a decimal figure, or sometimes a percentage. For example, a compa-ratio of 1.0 (or 100%) means that the employee’s salary sits exactly at the midpoint of the range.
To make things clearer, let’s look at an example:
- A salary range has a minimum of €30,000 and a maximum of €40,000
- An employee’s salary is €32,000
To work out the compa-ratio, we need the midpoint of the range, which is €35,000. Then, we divide the employee’s salary by the midpoint, like this:
32,000 / 35,000 = 0.91
Of course, you wouldn’t expect every employee to have a compa-ratio of 1.0 or higher — that’s the whole point of a salary range. But tracking individual compa-ratios can help managers make decisions about that employee’s compensation when it’s time to review it. For example, if an employee has been performing well but their compa-ratio is still below 1.0, it could be time to increase their salary.
You can also measure the compa-ratio of a group of employees, either to compare them to the external market or to compare one department or group to another within your organisation.
3. Salary range penetration
Salary range penetration is a percentage figure that tells us where a particular employee sits within their pay range. While compa-ratio compares an employee’s salary to a single data point (the midpoint), salary range penetration considers it in relation to the entire range.
Here’s the formula you need to calculate it:
(salary − range minimum) / (range maximum − range minimum)
Again, let’s take a look at a (fictional) example:
- A salary range has a minimum of €40,000 and a maximum of €65,000
- The employee’s salary is €48,000
If we plug these numbers into the formula above, we get this:
(48,000 − 40,000) / (65,000 − 40,000) = 0.53
We then multiply this figure by 100 to give us a percentage: 53%. So this employee is sitting roughly in the middle of their range.
You can use salary range penetration to set targets for different levels within your salary ranges. For example, you might decide that junior employees should sit within the lower 25% of the range, with only the highest performers reaching the top 25%.
4. Target percentile vs. actual positioning
Percentiles are a useful way of comparing a company’s compensation with the distribution of salaries on the market. A salary at the 50th percentile is at the midpoint of the market. That means someone earning this salary earns more than 50% of others in that role, and less than the other 50%.
Setting your salaries at a higher percentile is an effective way to attract top talent. But here’s the problem: compensation isn’t static. That means that if you hired someone at the 75th percentile a few years ago and haven’t adjusted their pay since, you might find that their compensation is no longer competitive. And before long, that employee will likely move on to another employer who’s willing to pay them at the (current) 75th percentile.
To avoid losing their best employees, HR and compensation teams need to monitor how their actual salaries compare to their target percentiles — and make sure these don’t slip down over time.
5. Internal equity
As well as understanding how your compensation compares to your peers and competitors, it’s also important to look inward.
Calculating your internal pay equity allows you to uncover and stamp out any unfair or discriminatory pay practices that are going on within your organisation. That might include paying employees less than others because of their race, sexual orientation, ability or any other protected characteristic.
But if you’re just getting started with tracking pay equity metrics, you might want to begin by calculating your gender pay gap. Here’s the formula to use:
(median compensation for men − median compensation for women) / median compensation for men
You can work out your overall gender pay gap by plugging in the median salaries for men and women across the whole organisation. If you have a large gap, this could indicate problems with representation or promotion practices across your organisation.
But to work out whether your pay is equitable, you need to compare the salaries of men and women who are doing the same or similar work.
For example, let’s say the median salary for your male engineers is €42,000 and the median salary for your female engineers is €39,000. When we use the formula above, we get this:
(42,000−38,000) / 42,000 = 0.095
When we multiply this by 100, we find there’s a gap of 9.5%. Unless this can be explained by differences in experience, qualifications or performance, this organisation likely has a problem with pay equity.
Bonus: Annual turnover rate
While not technically a compensation metric, your annual turnover rate can give you valuable insights into whether your compensation strategy is working. After all, compensation and benefits are two of the key drivers of retention and attrition, according to McKinsey.
To measure employee turnover, you need to take the number of employees that left your organisation during a particular period and divide that by the average number of employees that the company had during that time.
Here’s an example: Let’s say your company had 110 employees on 1st January, and 130 employees on December 31st. Then, imagine that 12 people left your organisation over the year.
The average number of employees you had over the year was 120, so we need to do the following calculation:
12 / 120 = 0.1
We can then multiply that figure by 100 to give us a percentage: 10%.
Track and manage compensation with Figures
Figures is Europe’s leading compensation management platform, and our mission is to help mid-market companies and enterprises make fair and efficient salary decisions. To do that, we rely on our huge dataset of real salary data from over 1000 companies across Europe and beyond.
Using Figures, you can instantly compare your compensation policy to the market to find out how you stack up with your peers and competitors. You can configure percentiles to fit your company’s compensation policy, and even automate salary band generation using our real-time, accurate market data.
And that’s just for starters.
Basically, Figures gives you everything you need to track and manage compensation within your company, to give your employees the fair and competitive salaries they deserve.
Want to learn more? Sign up for a free demo to get started.