Dr John Sullivan Talent Management Thought Leadership

The only HR metrics that execs don’t consider to be dreaded “so what metrics” are bus. impact metrics.

A Think Piece – for getting HR leaders to begin adding business impact metrics.

Few within HR realize it. A whopping 70% of all variable business costs can be expended on employee compensation and benefits. Yet despite being literally the most costly among all business functions, the rewards function is only listed 7th in the definitive BCG study that quantified each HR area’s business impacts on revenue and profit.

And because the compensation function also routinely has the worst “dollar spent per dollar returned ratio” in HR (the ROI from comp dollars). I am using this individual subfunction throughout this article as an example of the needed changes in business impact metrics that must eventually spread throughout HR.

Why Business Impact Metrics Are So Critical

CEOs often say that “people are the most important asset.” However, after years of being a CEO myself, I can report that what most really care about is generally limited to revenues, profit, and stock price. 

I have written extensively over the last two decades about what I call Business Impact HR (BIHR). This is where HR (just like every other business and admin function) should be laser-focused. That focus should start by increasing those impacts. And then, the effort should make them highly visible to all. In practice, reviewing business impacts are all that most strategic executives really care about.

Yet measuring and reporting business impact metrics rarely occurs in any HR function, especially in compensation. Over time I have found that a primary reason for the underuse of this metric area within compensation. Include its reliance on strictly technical metrics (like compa-ratios), not being data-driven, and the unwillingness for comp leaders to accept full accountability for producing significant business impacts.

Therefore, in practice, neither executives nor comp leaders realize how they could spend the same amount of money in different ways on rewards and benefits. With the shift in how comp is distributed, there will be an immediate improvement in primary business metrics like workforce productivity, innovation, revenue, and margins.

Unfortunately, among the consequences of continually failing to show your executives that compensation continually uses data to improve its business impacts and our company’s competitive advantage, most comp leaders unnecessarily hurt their credibility and unknowingly reduce the budget for their function. If you’re unfamiliar with the difference between business impact metrics (usually expressed in dollars) and functional HR metrics. Here are some examples.

Business Impact Metrics	Compared To	Functional HR Metrics
Revenue		Time to fill
Profit		Turnover percentage
Market share		Number of training hours offered
Innovation value		Onboarding participation rate
Stock price		Promotion rate

Additional Metric Failures

For the record, other strategic metric failures in the compensation/benefits function include the absence of forward-looking “predictive metrics” that would warn leaders about upcoming comp issues they must become aware of. And “prescriptive metrics” that provide guidance on the most impactful actions that will directly improve the future value derived from the compensation dollars spent. If you’re interested, I would note that other HR functions that often severely lack business impact metrics include recruiting, onboarding, retention, employer branding, and performance management.

Critical Business Impact Areas That Compensation Should Directly Impact

The primary focus of this article is to highlight the areas where HR (and in this case, specifically the compensation function) should be measuring and then improving its business impacts, just like all other business and HR functions. Compensation’s primary goal should be to directly impact each talent and productivity factor that leads to increased revenue, profit, and business value. The top 10 most critical business impact areas are listed below, where the most critical ones appear first.

• Workforce productivity | Can you prove that your compensation practices directly increase overall employee productivity? – The primary workforce goal should be to increase its overall productivity. Employee productivity is the dollar output produced per employee for every dollar spent on their compensation and benefits (the same formula as ROI). And because every employee needs to be continually productive, compensation must impact every day on every employee. 
  
  To start determining your workforce productivity each year by taking the dollar value of the output created by your workforce last year (get that from your COO or alternatively use total company revenue). Then, divide your total labor costs into that number. When you experience a year-over-year improvement in that ratio (i.e., more return for dollars spent), consider it an indication that your workforce productivity is improving. An easier alternative measure is where you compare your revenue per employee dollar amount (i.e., total corporate revenue divided by the number of employees) to your competitors (for example, on MarketWatch.com, the revenue per employee of Apple’s is $2.5 million per employee).
  
  If you want to identify the factors that resulted in any change in that productivity. Anonymously survey a sample of your managers and employees. Ask them to list the positive factors that directly helped them improve their productivity this year. And the negative factors that, in their experience, reduced their productivity. If compensation/benefits are not one of the top three positive factors or if it is among the negative factors. Compensation has much more work to do.

• Employee innovation | Can you prove that your compensation practices directly lead to an increased value of implemented innovation? – although the above-referenced BCG study didn’t cover employee innovation. Other companies like Apple and Google have found that it is the single highest value output from their workforce (Google, for example, found that a top innovator engineer can produce 300 times more value than an average one). So work with your managers to identify the top innovators on their teams. Then survey them to determine what specific talent management actions had the most impact on increasing their innovation. Obviously, compensation should be a major contributor in this critical area.

• Output quality/timeliness | Can you prove that your rewards approach is also improving each output sub-measure? – in addition to creating a higher volume of output. Your compensation practices should also directly influence all other important output sub-measures, including output quality, timeliness, costs, customer service, safety, and revenue generation. To determine your impact on these output sub-measures, survey a sample of your managers and employees to determine which compensation practices have positively impacted each of the individual output sub-measures. This anonymous survey asks participants to list the talent management actions that positively or negatively impact each sub-measure. Obviously, you want the compensation and the rewards for each sub-measure to be a top contributing factor to improving their results under each one.

• Employee motivation | Can you prove that competition provides top employee motivators? – because one of the key drivers of productivity is the level of employee motivation on the team. Motivated employees are energized to do more, do better work, and stay longer. And because both pay and benefits are almost always primary employee motivators. One of the primary direct calls of the compensation function should be taking pay and benefit actions that increase employee motivation. In addition, because pay and benefits are so expensive. It’s also essential as a supplement to motivators that cost the company money.
  
  We know that these nonmonetary incentives can be highly effective because so many of us volunteer our time outside the workplace with no expectation of receiving any compensation. The function should also provide help in maximizing employee motivation with the use of nonmonetary motivators. They are effective motivators, and they are much cheaper for the company. So the comp function should educate individual managers on the ROI of nonmonetary motivators. Then proactively aid individual managers by offering them brief “how-to guides” for the most effective nonmonetary motivators. Often include praise, recognition, work with a purpose, constructive feedback, job enrichment, and on-the-job development opportunities. Note that you shouldn’t call your function “total rewards” if you fail to offer nonmonetary incentives.
  
  The recommended action is for compensation leaders to create a motivation sub-team. Whose role should be educating managers about how to identify the specific motivators (of both types) within your organization currently impacting employee motivation. The second step for the sub-team is to anonymously survey a sample of your employees and ask them to rate their personal motivation level on a 1 to 10 scale (for comparison purposes). Next, list and rank order their prime motivating and demotivating factors. Obviously, comp leaders should be happy if nonmonetary rewards (along with pay and benefits) appear high on the list.

• Improving candidate acceptance rates | Can you prove that your compensation practices improve the acceptance rates of your candidates? – because recruiting has the very highest impact on company revenue and profits. You must demonstrate that your compensation practices result in hiring candidates who eventually perform better on the job (a.k.a. quality of hire). Of course, the best way to determine each compensation’s impact on recruiting is by surveying all new hires during onboarding.
  
  First, ask them to anonymously list and rank the “top attraction factors” that actually caused them to apply. Next, ask each new hire to list in descending order the key “offer acceptance factors” (that you met) that most influenced their decision to say yes. If comp or benefits don’t land in the top four of both lists, you have work to do. And then, 6 to 12 months after starting, review the answers your proven top performers and innovators provided to see if the factors that influenced them to apply and accept varied from those of the average new hire. If they were, educate your recruiting leaders on how they can get better quality candidates to apply. In addition, you should survey your recruiters periodically to determine if the compensation team’s slow or lowball job offers are contributing significantly to the loss of top candidates. Finally, you should also be able to prove that your employee referral compensation scheme also directly improves referral results

• Comp improves retention | Can you prove that your compensation practices increase the retention of “regrettable employees?” – especially in times of record turnover, it is critical to apply a data-driven approach to your compensation effort designed to improve retention. The most effective approach for identifying the top potential causes of turnover for your current employees is the use of (“stay interviews” (what factors cause you to stay?). This employee interview process is where you ask your “high flight risk employees,” at least once a year, to highlight the “sticky factors” that caused them to stay, negative factors, and those that might cause them to leave. Next, rather than relying on problematic standard exit interviews, wait 3-6 months after a key employee has departed and give them a delayed “post-exit interview.” This is where you ask former employees to list and rank the “real reasons” why they left. If results from these stay interviews indicate that compensation or benefits aren’t among the top 3 key reasons for staying. Or when weak comp was among the top reasons for leaving. Compensation has some impactful work to do.

• Prepared for the future | Can you prove that you prepare decision-makers for the future? – literally, almost everything in compensation currently has a historical perspective. However, in our fast-changing VUCA world, an effective comp department must also be anticipatory and proactive. So comp must collect data, forecast, and provide predictive and prescriptive metrics. In order to prepare managers for all major upcoming issues in total rewards. And as a result, compensation leaders need to work with corporate strategic planning, recruiting and workforce planning in order to develop forecasts covering upcoming opportunities and challenges in compensation and benefits. So that compensation leaders can for the first time develop effective and usable compensation plans. And so that team managers can be alerted in time to effectively act to handle all likely short and medium-term reward scenarios.

• Comp increases engagement | Can you prove that your compensation actions improve employee engagement? – If you care about employee engagement. You should add a question to your employee engagement survey. One that asks the employee to anonymously list the job-related factors that directly improved their engagement this year (both positive and negative). Then take action if compensation isn’t among the top engagement improvement factors. 

• Rewarding the right talent credentials | Can you prove that you are only paying for the credential areas with the highest impact on employee performance – Employees and new hires with added credentials can earn extra pay at many companies. Those “extra pay credentials” often include education, experience, seniority, shared values, or high past performance appraisal scores. And unfortunately, each will be a waste of money if possessing the factor doesn’t actually result in an increase in the employee’s performance. For example, even though experience is widely compensated. A Success Factors analysis revealed that for this target company, previous work experience turned out not to be a predictor of either future performance or tenure. So the first step is to identify the few compensable factors that really improve performance. Do that by identifying your top-performing established employees and new hires. Then statistically determine which of the possible credential factors have a high correlation with high employee performance on the job. Obviously, you should stop rewarding each of the expensive factors that don’t directly correlate with top job performance.

• Are you using the most effective types of pay| Can you prove that you consistently use only the types of pay that produce the highest business impact in each situation? – Obviously, not all of the various types of pay (like “show up pay” or “pay-for-performance”) have the same level of impact on increasing the most desirable work behaviors and business impacts. So compensation leaders need to develop a “comp R&D team.” One that uses internal and external data to determine which pay approach is the most effective for each factor you’re trying to incentivize (i.e., revenue generation, working faster, fewer errors, and better customer service). The best way to determine the highest impact type of pay is through “hypothesis testing,” where you conduct either a small pilot experiment or use split-sample tests. Both will allow you to determine the most effective type of reward action precisely. Various rewards whose impact should be tested generally include base salary, performance bonuses, stock offerings, pay at risk, COLA, equity pay increases, higher pay quartiles, attendance bonuses, benefits, or praise and recognition.

You should also do hypothesis testing to answer often debated common compensation questions. For example, “Should the pay percentile target be the same across all jobs,” do new hire salary negotiations have a negative adverse gender impact, and “Does attempting to save money on employee compensation actually save the business money over the long term?” Below are some additional hypotheses that might be tested or measured.

Is an overall comp. impact index valuable?	The external image of your pay practices?
How often to review pay and benefits?	The impact of a benefit on rec./retention
Identifying who is over/underpaid	How often should you pay employees?
The best nonmonetary motivators	Minimizing administrative pay errors
Can excessive pay increase unethical acts?	How often to review pay and benefits?
The ideal pay differential for performers	The impact of tying pay to KPIs
Practices that provide a competitive adv.	How long does a raise’s impact last?
Getting executives to read your metrics	Executive rewards and motivators

If you can only do one thing – start out on the right foot by getting your initial business impact estimates accurate. Begin by working with the CFO, the COO, and the data analytics team to select a few initial focus areas to begin making estimates in (like sales rewards, retention bonuses and referral bonuses) to ensure that you have thoroughly worked out the bugs in these areas. Your initial business impact estimates should be fully defendable.

Eventually, Develop Business Impact Metrics In These Additional Results Areas 

The next priority for both HR and compensation leaders should be to develop metrics that provide evidence that you improve business results in a handful of expanded talent areas that have been proven to lead to future business impacts directly. Those additional areas that are also likely to have business impacts include:

Improvement and project completion rates	Expanded global and gender pay inequity
Diversity recruiting and retention	Upskilling the workforce
Better internal movement	Upskilling
Improving employee attendance	Better leadership development
Executive pay tied to results	Raising productivity from remote work

Final Thoughts

Each reader should remember that the ultimate broader goal for the comp/benefits function is to “become more businesslike.” A key part of that new role is accepting complete accountability, by being able to demonstrate to executives and managers that each dollar spent on rewards and benefits is producing its maximum measurable business impact. And to ensure that every manager and employee fully understands what is most important for improving business results, simply by observing what compensation measures, rewards, and reports. 

And finally, everyone should realize that within the HR umbrella of subfunctions. Unfortunately, the comp/benefits function is not alone in its failure to promptly develop and utilize business impact metrics. In fact for the record, other HR functions that deserve honorable mention for having painfully weak to non-existent business impact metrics, include workforce planning, performance management, employee happiness, and managing the corporate culture. Lastly, I should note that the primary reason why I have found that HR functions have not shifted to business impact metrics a long time ago is because most in HR overflow with excuses and many are not actually businesspeople with a background in finance and statistics.

Author’s Note 

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