Compensation and benefits are an organization’s largest investments, often accounting for nearly 75% of a company’s total people spend, which is why it’s incredibly important to get your total rewards strategy right.
From prior experience as a former internal compensation professional, I’ve seen firsthand that when the “going is good,” an HR function runs like a well-oiled machine, with different groups marching in lockstep toward the same goals. Learning and development teams provide opportunities for coaching and development, human resources business partners solve people challenges, and talent acquisition professionals partner with diversity, equity, and inclusion specialists to find and hire talented, diverse individuals — with the total rewards team serving as a thought partner and strategic consultant across all areas of the employee lifecycle and people strategy.
When it comes to total rewards, the question that leadership teams naturally ask is “How does my organization know when we’ve mastered our strategy?” The answer lies in the ongoing analysis of various key performance indicators (KPI) to understand a rewards program’s strengths, and sometimes more importantly, its weaknesses.
With that, after tapping into the experience of Sequoia’s compensation advisory team, sprinkled with insights from numerous VC-backed technology and life sciences clients, here are the KPIs to monitor to build a first-class rewards program.
1. Talent Attraction
When assessing your compensation program, it’s important to analyze its ability to attract top talent. One key metric is the ratio of successfully filled roles compared to your annual hiring plan. Hopefully, this top-line metric is tracking well. If not, dig into why candidates are declining job offers. Reviewing feedback from recently declined offers can tell you if compensation was a critical factor in the candidates’ decisions. It’s also useful to review where declined offers fell within your defined compensation ranges to determine if you should make market positioning adjustments to enhance the attractiveness of future offers.
2. Talent Retention
Retaining existing top talent is also important, and possibly even more valuable than hiring, when you consider the high cost of employee turnover. Besides the day-to-day work value of tenured employees, long-term employees are valuable because of their deep institutional knowledge, their ability to train new hires, and their typical willingness to be strong culture carriers.
To assess the retentive hold of your compensation program, analyze voluntary turnover rates across various categories such as tenure, department, and level. If you’re seeing an uptick in voluntary turnover, particularly for longer tenured individuals, ask “How frequently are we seeing voluntary turnover where compensation was the key determining factor?”
To gather this type of intel, conduct exit interviews with all departing employees and ask about the role compensation played in their decision. Also, conducting regular employee engagement surveys can provide valuable insights into employees’ opinions about your existing compensation practices and policies. These surveys help to proactively identify employee frustrations around pay that may lead to attrition in the future.
3. Program Sustainability
So far, we’ve identified ways to show that your company’s compensation strategy is attractive to new talent, retentive to existing talent, and checks all the boxes from an employee-first standpoint. However, if employees were the only target audience, organizations would position everyone at the 90th percentile of market pay and have the best compensation program ever. Unfortunately, the world we live in today has constraints and organizations (especially their boards of directors) want to ensure they’re staying focused on total people spend and building programs that can be funded over the long term and align with their company’s financial goals.
A key metric that companies can use to assess program sustainability is the level of spend relative to budget. For an example focused on cash, we’ll look at the merit cycle. If your company’s merit budget was 4%, reviewing how you performed compared to this budget after a merit cycle is crucial. Did you come in under or over budget and why?
For equity compensation, look at the rate at which you’re awarding shares for new hires and equity refresh grants — also known as your burn rate — and how long your pool of available shares will last, if you keep going at the current rate.
Your board and investors will also be interested in understanding your equity overhang, which is the total number of shares that have been issued or reserved for employees out of the total number of shares. Burn rate and overhang illustrate how dilutive your equity programs have been to investors’ equity stakes in your company.
4. Employee Motivation & Performance
When companies consider a motivating compensation strategy, they aim to demonstrate how well they can accelerate employee performance, encourage skill development and learning, and influence behaviors that contribute to company goals. This is incredibly important because companies aren’t just asking “Do employees like our pay strategy? And can we afford it?” Companies are really asking “Is this program motivating our employees to do the things our company needs them to do, at a cost level that makes sense for our business?”
Some top-line metrics you can use to assess this are key financial indicators like revenue growth, net income growth, adjusted EBITDA, or in the world of private companies, valuation. To layer in compensation, assess incremental financial performance versus incremental people investments over a specific time period — often their fiscal year. So, this might look like revenue growth versus headcount expense growth.
It’s particularly important to track these financial metrics for roles eligible for incentive compensation, such as sales commissions. For roles that aren’t eligible, think about how your company can highlight and differentiate rewards for strong performance toward key business results.
5. Internal Equity & Fairness
Fair compensation is crucial for maintaining trust and satisfaction among your employees. To measure the fairness of you organization’s compensation program, there are two key questions to consider.
First, are your resources aligned with your organization’s compensation philosophy? It’s important to ensure that compensation decisions reflect your established guidelines and principles, especially if thy’ve been communicated to your employees. For example, if the company prioritizes paying top performers at the higher end of their compensation ranges, individual compensation decisions should uphold this principle.
Second, is internal parity maintained by compensating individuals based on their job responsibilities and contributions, rather than other factors? This speaks to the best practice of conducting internal pay equity analyses regularly (often annually) to analyze compensation ratios across different performance levels and employee groups.
A Total Compensation Solution
Gathering all these metrics and KPIs requires companies to consolidate information from various systems such as payroll, equity admin, finance and accounting, and HRIS. This data then needs to be cleaned up and organized to ensure accuracy and ease of understanding. That’s why Sequoia created Comp OS, an end-to-end compensation solution that simplifies the complexities of total compensation.
Comp OS pull all of your people data into one platform, so you gain immediate visibility, real-time analytics, and better control over your people spend, allowing you to make informed decisions and take impactful actions.
To learn more about Comp OS or to see a demo, connect with a Sequoia advisor.
