Human capital is a company’s most important asset. It’s also typically the largest operating expense, and thus can have a major impact on profitability and overall success. To keep employees engaged and productive, companies must compensate them appropriately—without overpaying them and running the risk of eroding the bottom line.
IMPACT ON Your Bottom Line
According to a report by the Human Capital Management Institute and Human Concepts, the total cost of a company’s workforce can average nearly 70% of all operating expenses. In other words, your payroll has a major impact on your bottom line.
Most companies invest heavily in technologies such as cloud based CRM software, accounting systems, big data analytics, and project management tools to scale their business and become more efficient. But, the truly innovative companies invest in compensation management software to help get the most value out of their payroll—ultimately getting the most bang for their buck.
Let’s take a look at a couple of scenarios where not having the right compensation tools and processes can cost you money and impact your bottom line.
The Cost of Overpaying. If you are relying on free data, or worse no data at all, you are at risk of overpaying employees. If you are overpaying by just 2% on a $10 million dollar payroll, you are potentially misallocating $200,000. If you’re not using fresh data, there is no way to know if you are paying more than the market rate.
The High Cost of Turnover. In the 2016 Compensation Best Practices Report, compensation—defined as seeking higher pay elsewhere—was a top reason people left companies in 2015, second only to ‘personal reasons’. If you’re not paying your employees fairly, chances are someone else will. Turnover is more than an inconvenience; it can be incredibly costly. In an article by ERE Media, the cost to replace just 12 employees in a year can be upwards of $250,000 due to lost productivity, recruiting costs, and training costs.
Impact on revenue
Compensation is directly tied to your revenue. Your product or service doesn’t get delivered unless you have the right people doing the right things to make your business run smoothly. Imagine being a small software company in a competitive market. Think about how the following scenario could play out at your business:
Let’s say that at the beginning of the next month, you are scheduled to release a new product. With this product release you expect to make $100 a day in new revenue (see figure 1). However, two weeks before your new product launch, your VP of Development leaves for higher pay elsewhere. This delays your product launch causing you to miss out on the expected revenue. Not only are you missing on your revenue targets, you now have to explain that to your investors and board of directors. That’s not a position you want to be in.
Impact on Culture
How you pay, and how you communicate pay, is crucial to your company culture. You can choose to pay fairly and transparently to become the employer of choice, or, you can take a guess at pay and keep quiet about your pay practices and be the company in everyone flees then flames on Glassdoor. The choice is yours.
How you communicate pay is as, if not more, important as what you pay. The 2016 Compensation Best Practices Report states that 82% of employees said they would feel satisfied with below market pay if their employer was transparent about the reasons.
How to make your comp strategy work for your company
The goal of your compensation strategy is to better align your workforce to company goals. It’s technologies like PayScale’s compensation management software that will help you use fresh data to efficiently allocate your compensation dollars so that you are making decisions about compensation that are financially sustainable in the market place.
See what PayScale can do for you. Get a demo.