June 27, 2024
At Total Reward Solutions, we are frequently asked about the cost of doing a compensation study. So, let’s take that on its face and give some parameters: The study cost for each organization varies based on its number of job titles, number of employees, how many locations have employees, and how many survey sources will be utilized for the study. With this information, a consultant should be able to provide an estimate for a compensation study. BUT, perhaps the more important question is this:
How costly is it for an organization to NOT do a compensation study?
Consider These Surprising Facts:
When it comes to the cost impact of not performing a compensation study, consider the following:
- Turnover is extremely costly, typically ranging from 1.5 to 2.0 x the annual salary of a position. Thus, a $50,000/year job can cost $75,000 to $100,000 to replace.
- Turnover can cause lost productivity, additional recruiting cost, training cost, and potentially even more turnover because remaining employees get stretched too thin during the replacement process
- Turnover can impact timely delivery of products or services, as well, potentially harming your company’s reputation
The ROI of Doing a Compensation Study
Now that the potential costs of NOT doing a compensation study are clear, what is the Return on Investment (ROI) of having one performed? This can be looked at in several ways.
- Cost per Employee: The total cost of the project divided by the number of employees to ensure current market competitive rates
- Cost Compared to Average Annual Salary: The total cost of the project divided by the average annual salary of employees (Hint: The project cost is typically lower than the average employee salary)
- Cost of Just One Employee Turnover: The total project cost divided by the cost of a single employee turnover. Again, typically project costs are lower. This does not take into consideration the potential for lost revenue. If you lose several employees due to compensation issues, those costs can escalate very quickly.
- Cost of Project as a Percent of Revenues: This number is typically exceptionally low, a fraction of a percent of revenues It’s an investment in your employees at a small cost to revenues.
Other Benefits of Performing a Compensation Study
Beyond the benefits of reduced turnover and a positive ROI, there can be other benefits from using a qualified and experienced compensation consultant to do a market study:
- The professional combs through thousands of survey descriptions to find the best matches to your jobs
- The professional knows how to select the appropriate scopes to use to get the best data for each company
- The professional is knowledgeable about how to use and interpret the data, as there can be many nuances in how the data is reported
- The professional is experienced in designing the most appropriate pay structure for each different type of organization
The Bottom Line:
In our nearly 20 years of experience, we find that most proactive companies understand both the cost of doing a compensation study and the cost of not doing a compensation study; and they understand the cost of not doing a compensation study is greater than the cost of doing one.
Unfortunately, those who ignore the inherent costs of NOT doing a compensation study usually experience continuing turnover. Therefore, that turnover cost for one employee soon becomes turnover cost for four or five employees! At that $50,000 annual salary example, five employees can now cost an organization $375,000 – $500,000. Can your organization afford those costs?
But why even wait for turnover to decide to do a compensation study? Employers win trust and loyalty with their employees when they regularly monitor the market through a compensation study and continue to ensure they are providing market competitive rates.
So, if it’s time to perform a compensation study or update your last one, we at Total Reward Solutions are ready to help! Contact us today at 317.589.8529 to discuss this or any other employee compensation consulting service you might need.
Cassandra Faurote
About Total Reward Solutions:
Total Reward Solutions is your trusted partner for compensation services. Led by Cassandra Faurote, professionally certified Compensation and Human Resources expert and author of the book Compensation Sense 101, Total Reward Solutions offers a broad range of compensation and total rewards consulting services to help your organization attract top talent, motivate employees, and retain top performers. We can partner with you on a project basis, on retainer, or as your total outsourced solutions provider for compensation services.