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How to measure the effectiveness of your compensation strategy

The Aeqium Team

Navigating employee compensation is no small feat. 

It's an ongoing journey filled with twists and turns, often leaving even the most experienced HR professionals and business leaders feeling lost in a labyrinth of market rates, budget constraints, and regulatory compliance.

But the most frustrating part? It can be hard to tell if all your hard work is paying off…

To help you measure your compensation strategy’s effectiveness, we spoke with industry expert AJ Cole. Cole is a seasoned compensation strategy expert with experience at AirBnB, Meta, and Impossible Foods, and his insights provide a valuable framework for organizations looking to optimize their compensation strategies with an analytical approach.

1. Measuring Market Competitiveness

Compensation KPIs and Sources:

KPI Source(s) How to implement
Offer acceptance rates ATS for tracking offers made, accepted, and declined. Possibly integrate with HRIS for a fuller picture. Extract data from the ATS, focusing on offer statuses. Analyze trends over time, by department, and by role to identify patterns and opportunities for improvement.
Offer decline reasons ATS for tracking declined offer count + standardized candidate survey to capture reasons for declining. Link declined offer records to candidate survey responses. Analyze data to understand the most common reasons for declining offers and develop strategies to address them.
Turnover rates and exit survey data Human Resource Information System (HRIS) for exit data + standardized exit survey for qualitative feedback. Calculate turnover rates by dividing the number of departures by the average number of employees over a period. Link turnover data with exit survey responses to identify trends and areas for improvement.

AJ’s Perspective:

“While we often use metrics like 'compa-ratio' to define how closely aligned our actual compensation is relative to the market (or market-derived ranges), these comparisons are only as good (and as recent) as the data that went into them. I've found it's important to partner with your HR peers to regularly evaluate how effective your compensation strategy is when applied to real-world scenarios. 

Your TA team will have the data and be the first to notice extended time-to-hire and low offer acceptance rates, which can be early signals to refresh your underlying market data and perhaps update your ranges. 

On the other hand, your HRBPs can tell you that the reasons behind employee turnover are often complex. Still, if compensation is commonly cited in exit surveys, it's worth investigating because it could become a problem requiring costly corrections.”

2. Measuring Internal Equity and Satisfaction

Compensation KPIs and Sources:

KPI Source(s) How to implement
Employee satisfaction rates Engagement survey platform +
Human Resource Information System (HRIS) for demographic data.
Aggregate anonymized survey responses to calculate overall satisfaction rates. Segment data by department, tenure, or other relevant demographics to identify patterns and areas for improvement.
Pay Equity Reviews Payroll data for current employee compensation + HRIS for job title, department, tenure, etc. Use statistical analysis tools to perform regression analysis and identify any disparities in pay that cannot be explained by job-related factors. This helps in identifying and addressing systemic pay inequities.
High-Performer Retention Rate HRIS for employee performance ratings, tenure, promotion history, etc. Calculate retention rates specifically for high-performing employees. Analyze trends over time and by department to identify what factors contribute to retaining top talent.

AJ’s Perspective:

Even if you could say your compensation program is 100% equitable, competitive, and consistent today, future ad hoc decisions made in good faith might not be so perfectly calibrated. And if you aren't regularly monitoring your pay practices, these ad hoc decisions can quickly add up to significant differences in compensation decisions and outcomes.

3. Measuring Financial Sustainability

Compensation KPIs and Sources:

KPI Source(s) How to implement
Compensation costs vs. revenue ratios Financial system for revenue data + compensation data from payroll and HRIS. Calculate the compensation cost vs. revenue ratio by dividing the total compensation costs by the total revenue for the same period. Analyze trends over time and benchmark against industry standards.
Red and green circled rates HRIS for employee compensation and assigned salary grades/ranges. Identify red circled employees by finding those paid above their salary range and green circled employees as those paid below their salary range. Calculate the proportion of each within the organization.
Pay compression rates HRIS for detailed employee compensation, tenure, and job grade data. Calculate pay compression by comparing salary differences between employees in similar roles with different tenure lengths. Identify where the pay gap is narrower than expected and assess the impact on morale and retention.

AJ’s Perspective:

“Revenue is useful as a filter for relevant peer groups/market data sets, but fundamentally, it's also helpful to provide context related to the expenses we incur for labor with our pay programs. For example, if we're trying to attract talent from firms with revenue substantially greater than ours, we know they have greater resources to deploy in competing compensation negotiations. We may see the effects of this in more common exceptions to our pay bands, with offers going out above the band (red-circled).

Not all compensation strategies are viable for all organizations or even for all stages of an organization's development. Understanding what is sustainable is important to help determine an appropriate compensation strategy for your organization that effectively competes for talent from the sources with the skills you need."

Continuously Improving Your Compensation Strategy

The effectiveness of a compensation strategy requires constant analysis and ongoing refinement.

Adopting a holistic approach to measuring and monitoring market competitiveness, internal equity, and financial sustainability can help keep your compensation approach competitive.

Want to see how the people teams at Braze, Warby Parker, Hopper, and Thoropass measure their compensation strategies? Check out a demo of Aeqium’s compensation analysis, planning, and communication tools today.

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