It’s time to talk about communication. That means it’s time for everyone to get out their calculators (or spreadsheets) and do a little math. (Woohoo! We get to do math today!)
I meet very few compensation professionals or members of executive management teams who strongly believe they are doing a good job communicating their pay programs. And yet, companies continue to short change communication budgets even though we all know that “Everything You Do in Compensation is Communication.”
After years of working with all types and sizes of companies, I have come up with a little math project that has helped my clients and may help you and your management determine a reasonable budget for compensation communications.
Start with the total amount your company spent on compensation over the past three years. Use the amount of compensation expense recognized by the company in one set of calculations. Use the actual amounts delivered (including things like equity gains, benefit or pension payouts etc.) in another set of calculations.
Break the three-year total into amounts for each major pay elements (if it accounts for at least 5% of pay, assume it is major).
For each major element of pay, estimate the percentage of total value that employees perceive the element to be worth to them. We will call this the Pay Perception Value.
Then for each major pay element estimate, as a percentage, how well your employees understand how each pay element works and why the company uses it. We will call this the Pay Understanding Value.
Next, multiply the amount by the percentage of perceived value. This is the value that your total rewards are providing to employees for the purposes of attraction, motivation, engagement and retention.
Now multiply Pay Perception Value by the Pay Understanding Value and subtract the result from the Pay Perception Value.
This is the bare minimum of wasted compensation dollars. Your original compensation data may tell you that your company pays in the 50th percentile, but to your employees, it probably feels like the 25th (or worse).
Now imagine you started with a 3 year total compensation number that was 5% less. In this case, it would be $85,500,000. Imagine if you spent just half of this savings ($2,250,000) on better communication. Before you say "Dan is INSANE!" What if this investment in communication improved your Pay Perception Value by 10% and your Pay Understanding Value by 15%?
It doesn’t require some astronomic doubling of success for this approach to begin showing returns. Of course, this is not as simple as the example shown here, but I challenge every reader to do these quick calculations for their own company (use estimates to within 5%) and post the results in the comment section of this post. Most companies don't spend even 20% of the amounts this calculation shows. When you spend the time and effort to dig into the Pay Perception Value and Pay Understanding Value percentages, you may find that you are doing a great job. You may also be shocked to discover how little your employees buy into their pay.
What is your “break even” point for the enhanced communication approach? Can you show your management team how paying less will result in people feeling like they are paid more?
And a couple of examples of the basic math behind this approach…
Company spends $90,000,000 in total compensation over three years.
(Maybe $100,000 - $200,000 spent in total communications)
Pay Perception Value is an average of 75%.
Pay Understanding Value is an average of 65%.
$90,000,000 x 75% = $67,500,000
$67,500,000 x 65% = $43,875,000
Minimum wasted compensation = $23,625,000
Example 2 (enhanced communication approach)
Company spends $85,500,000 in total compensation over three years
Company spends $2,250,000 in enhanced communications
Pay Perception Value increases to an average of 85%
Pay Understanding Value improves to an average of 80%
$88,500,000 x 85% = $72,675,000 (an increase in Perceived Value of $5,175,000 over the higher legacy pay)
$72,675,000 x 80% = 58,140,000 (an increase of $14,265,000 over the higher pay package)
Minimum wasted compensation = $14,535,000 (you throw away $9,090,000 less)
Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with company strategy and culture. You may want to get a copy of “Everything You Do in COMPENSATION IS COMMUNICATION” written by Dan Walter, Ann Bares and Margaret O’Hanlon of the Comp Café as a practical guide to improving the communication process. Dan has also co-authored of several other books you may find useful including “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, and “Equity Alternatives.” Dan welcomes connections on LinkedIn. Follow him on Twitter at@Performensation and @SayOnPay.