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 first-hand 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 contribute by providing opportunities for the coaching and development of staff, HRBPs are there to solve people challenges specific to their function, and Talent Acquisition professionals closely partner with DEI specialists to source and secure the most talented, diverse individuals that’ll usher in a new wave of success for a company – with the Total Rewards team being an amazing thought-partner and strategic consultant across all areas of the employee lifecycle and people strategy.
So, the question that all leadership teams naturally ask themselves becomes “how does an organization know when they’ve mastered their total rewards strategy?” The answer is, this level of understanding is only achieved through ongoing program analysis of various key performance indicators (KPI) to understand both the rewards program’s strengths, and sometimes more importantly, its opportunity areas that need to be reviewed.
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, the following areas have become known KPI’s toward building a first-class rewards program.
1. Talent Attraction
One key defining trait when assessing your compensation program involves analyzing its ability to attract top talent. One key metric to evaluate this is the ratio of successfully filled roles compared to your annual hiring plan. Hopefully this topline metric is tracking well, but if not, this is when it’s critical to dig into the “why” behind candidate’s declining your job offers to understand if compensation is playing a key role in your organization’s recruitment challenges. For example, reviewing feedback from recently declined offers can help determine if compensation was a critical factor in the candidate’s decisioning process. It’s also useful to review where declined offers fell within your defined compensation ranges to determine if market positioning adjustments to enhance the attractiveness of future compensation offerings should be considered.
2. Talent Retention
While attracting new talent is vitally important to the success of an organization, retaining existing top talent at minimum is equally important, possibly even more valuable when considering the well-documented cost of employee turnover in the market today. Besides the day-to-day work value of more tenured employees, long-term employees are valuable assets due to their possession of deep institutional knowledge, their ability to teach and upskill new hires, and their willingness to be strong culture carriers.
A key topline metric to assess the retentive hold of your compensation program is to analyze voluntary turnover rates across various categories such as tenure, department, level, etc. If you’re seeing an uptick in voluntary turnover, particularly for longer tenured individuals, it can be helpful to answer the question of: “How frequently are we seeing voluntary turnover where compensation was the key determining factor in their decision to leave the company?” To gather this type of intel, it’s important to conduct exit interviews with all departing employees to determine if compensation was indeed “a” contributing factor or “the” leading factor for their impending departure. Additionally, conducting regular employee engagement surveys can provide valuable insights into the retentive value of your existing compensation practices and policies. Engagement surveys help to proactively identify employee frustrations around pay packages that may lead to attrition in the future.
3. Program Sustainability
So far, this blog post has 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. Unfortunately, if employees were the only target audience, organizations would just position everybody 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 Boards) want to ensure that companies are staying focused on total people spend and building programs that can be funded over the long-term while continuing to align with a company’s financial goals.
A key metric that companies can use to assess program sustainability is the level of spend relative to the budget that has been allocated in partnership with Finance teams. Focusing on cash for a moment, if a company’s merit budget was 4%, reviewing how the company performed to this budget once merit cycle decisions were completed is crucial. In the end, did the company come in under or over budget and why? For equity compensation, you can similarly look to understand the rate at which you’re spending shares on employee new hires or refresh equity programs – also known as your burn rate – and how long your pool of remaining shares available will last if you keep going at the current rate. Your Board and investors will also be interested in understanding your equity overhang (or the total number of shares that have been issued to employees out of the total number of shares that exist for your company). Burn rate and overhang metrics help illustrate how dilutive your equity programs have been to investors’ equity stakes in your company.
4. Employee Motivation & Performance
When companies think about a compensation strategy that is motivating, what they’re trying to show is the extent to which they’re able to accelerate employee performance, encourage employee’s internal desire to learn & develop, and influence employee behaviors that will contribute to the company’s goals for the right level of investment. This is incredibly important because companies are not just asking “Do employees like our pay strategy? And can we afford our pay strategy?” Companies are really drilling into “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 topline metrics you can use to assess this are key financial indicators – like revenue growth, net income growth, adjusted EBITDA, or company valuation in the private company world. To layer compensation onto this, companies can assess incremental financial performance versus incremental people investments over a specific time period – often their fiscal year. So, this might look like: revenue growth vs. headcount expense growth.
It’s particularly important for companies to track these financial metrics for roles with incentive compensation (e.g. sales compensation). For roles that don’t have commission-like incentive eligibility, companies should think about how they (often via managers) can highlight and differentiate rewards for employees who exhibit strong performance towards driving key business results.
5. Internal Equity & Fairness
Fair compensation is crucial for maintaining trust and satisfaction among your employees. To assess the fairness of an organization’s compensation program, there are two key questions to consider:
First, are resources strategically allocated in alignment with the organization’s compensation philosophy? It’s important to ensure that compensation decisions reflect the established guidelines and principles that have been set for your organization, especially if these guidelines have 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 on a regular basis (often annually) to analyze compensation ratios across different performance levels allows for a comparison and evaluation of employee groups.
A Total Compensation Solution
Powering all these metrics and KPIs requires companies to gather and 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 is why Sequoia created Comp OS, an end-to-end compensation solution that simplifies the complexities of total compensation.
With Comp OS, you gain immediate visibility and better control over your global people spend, allowing you to make informed decisions and take impactful actions. Sequoia clients can enjoy a free trial of Comp OS until May 31, 2024. Activate your free trial of Comp OS today.
Sequoia One PEO clients can access the platform’s features at no additional cost.
