Why You Need to Provide Your CEO With A Compa-Ratio

10 Aug

HR Need to Help Determine Compensation StructuresIt used to be that human resources professionals were relied upon to manage data, diagnose problems and offer solutions for all concerns relating to employees and the various emotional factors that influence productivity levels.

But within the past several years, HR professionals have taken a strong footing within the day-to-day management and strategy concerns of running a successful business. After all, what drives a business can ultimately be delineated to its personnel, specifically their level of happiness and engagement, as well as the various strategies involved in hiring new talent.

Even so, what makes a business function is employee compensation – if workers are not afforded apt monetary rewards, productivity and retention rates will plummet. Even worse, poorly compensated workers – especially high-performers – may be lost to competitors.

However, payrolls are a business’ most expensive budget item, and over-compensation can inhibit corporate profitability goals. For this reason, CEOs need to engage directly with human resources executives to determine compensation structures that befit employee value.

HR departments should consider a number of factors in drafting compensation rates, including specialized skill sets and professional certifications, employee experience, the industry in question, business location and what competitors pay for similar skills.

Salaries are a frustratingly fragile business consideration. Deciding appropriate salaries is like striking a balance, with the need to reward and retain top performers on one end and a business’ bottom line on the other.

Strong salaries assert a business as an ideal employment opportunity and discourage departure to competitors, but they need to be as low as possible while still achieving such an end. Accordingly, chief executives and HR managers need to determine how much competitors are offering for equivalent positions and develop benefits packages that incentivize employees, including bonuses, stock options and retirement packages.

HR executives should provide corporate management with comparative analysis for both the industry and the business’ location. Determine how your company’s salaries compare to market rivals and how wages relate to your specific location’s average cost of living, as well as creative programs that can enhance the overall attractiveness of a compensation package.

In developing a compensation analysis for the C-suite, HR executives should include a common metric known as compa-ratio, which refers to the proximity of an employee’s salary to the midpoint of the salary range established by your company.

To determine compa-ratio, divide an individual employee’s salary (or the salary average of a group) by the median of the company’s salary range.

How to Calculate the Compa-Ratio

A compa-ratio of exactly 1.00 means a worker’s annual compensation is exactly at the company’s midpoint average, with higher figures indicating greater than the midpoint. These employees may be overpaid – a condition that requires careful maneuvering to address. Some HR managers would be better off leaving such salaries as they are to avoid discontent.

More importantly, employees who have been determined to have compa-ratios of lower than 1.00 are at risk for disengagement, dissatisfaction, lack of motivation and even departure.

This is one point where HR management begins to converge with business expansion and management and become an integral aspect of executive strategy. Tread this line carefully and be sure to involve the C-suite in such circumstances.

Interested in learning more business metrics that can help human resources provide strategic information to the C-Suite?  Download our What the CEO Needs From Human Resources white paper now.

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