April 16, 2018
In business, keeping score is important (think earnings reports, balance sheets, market share, etc.) – and yet not many companies know what a compensation scorecard is, or why it matters. Simply put, a well-crafted and comprehensive compensation scorecard not only describes your company’s various compensation program components; it’s also a valuable tool to help management measure and benchmark progress and performance year over year. Of course, there’s more to it than that, so, let’s dig deeper to learn why a compensation scorecard is essential to your total rewards program, and how to use it:
Compensation Scorecard Basics
The compensation scorecard is a valuable tool that helps you track what’s working and what needs adjustment in your compensation and total rewards systems. It helps you track and measure effective business drivers and results; and it helps you know where you really stand versus where you want to be per your total rewards philosophy.
First things first: It is important to understand that your company’s compensation scorecard can be created at – and directed toward – various levels in the organization. These can include the organization level, region or territory level, division level, department level, or even at a defined employee group level (such as non-exempt, exempt professional, exempt technical, etc.).
What the Compensation Scorecard Measures
The compensation scorecard can include several different types of measurements. For example, it can measure your compensation as a percent-to-market comparison if you have a market-based compensation system, or percent-to-midpoint if you have a pay-range compensation system. You can report metrics for your entire organization and then break them down into the levels mentioned above as appropriate. Keep in mind that these metrics can be more meaningful and valuable to management when tightly focused toward each group. Parsed into smaller reporting groups can also make it easier to pinpoint problem areas and make better, more targeted adjustments.
Measurements like these can help you understand how each group is being paid relative to your company-wide compensation philosophy. For example, if your aim is to pay on average at 100% of prevailing market compensation rates, but you have a group being compensated at 85% of market, that group is “under market”. If another group is paid at 120% of prevailing market rates, your compensation program for that group is “over market”. Thus, these metrics can help you see which groups, if any, are out of line with market and/or company norms.
Another key measurement is average incentive pay per department. This metric can help you see which groups are rewarded with the largest – and the smallest – average incentive pay. This can help senior management compare how well the organization’s divisions or departments are performing. What’s more, if an area is known to be high-performing but is not getting a high level of incentive compensation compared to other groups, this could highlight that something may be wrong with your incentive compensation program.
A review of costs versus budget as well as results versus objectives also can be good indicators of how well your incentive compensation plans are performing.
Average merit rating per department is also a valuable metric. This measurement, in the context of the company’s overall average ratings, can help management clearly see the correlation between performance measurement and merit awards. It can also indicate if some managers are more generous in their ratings than others.
And finally, Turnover and retention analyses are good tools that can help you evaluate compensation as well. High turnover in an area might be an indication of a possible compensation issue – although other factors could be in play. It is also helpful to find out about compensation satisfaction levels in exit interviews.
Bottom Line:
The compensation scorecard is an underused but highly valuable tool that can be used to track and measure performance in key compensation and rewards areas. When a compensation scorecard is well-designed to capture reliable data, the resulting metrics can paint a clear picture to aid management in refining various phases of your company’s compensation system. And when your compensation system is fair when viewed and measured through both internal and external lenses, it will be easier for your company to attract, retain, and motivate employees.
To learn more about how your company can create compensation scorecards for a more effective and efficient total rewards program, contact us today at 317.589.8529.
Cassandra Faurote
About Total Reward Solutions:
Total Reward Solutions is your trusted partner for compensation and benefit services. Led by respected and professionally certified Human Resources expert Cassandra Faurote, Total Reward Solutions offers a broad range of compensation, benefits, performance management, and reward/recognition 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.
Call us today at 317.589.8529 to discuss how we can help your organization develop and implement competitive and effective compensation and total reward programs.