Canadian HR Reporter

Canadian HR RepoRteR January 26, 2015 FeAtures 23 Labour law research just got faster, easier and more comprehensive. LabourSource™ on WestlawNext® Canada combines the most robust collection of grievance arbitrations with court and board decisions, expert commentary, legislation and collective bargaining-related content – with Canada's most advanced search engine. A single search delivers the content you're looking for, whether it's case law, legislation, commentary, or legal memos. You can then filter your results to get exactly what you need. With LabourSource, you'll always be confident that your research is complete and that you haven't missed anything. Experience the benefits • Prepare winning grievance arbitrations and labour board applications • Successfully negotiate favourable collective agreements • Stay up to date on the latest labour-related decisions, industrial relations and economic news Legal content that is labour focused, not labour intensive Introducing LabourSource™ on WestlawNext® Canada See the LabourSource advantage View a demo at westlawnextcanada.com/laboursource 00224EP-A47770 rECOgnitiOn Finding value in rewards Benchmarking overall costs with key business ratios By David Hoad and Nathalie Olds I n determining the effective- ness of reward programs, many organizations bench- mark compensation levels for jobs. But this is only one element of an effective reward program. Benchmarking reward pro- grams against key business ra- tios can help an organization re- main competitive and profitable. Plus, by providing information operations-focused leaders can relate to, HR ensures its place at the table for key decisions. To gain a broad picture of the overall effectiveness of your re- ward programs compared with the competition, benchmark the overall costs of reward against key business ratios, such as revenue, profitability and business strategy. One measure of reward ef- fectiveness is how much profit is gained from each employee com- pared with the competition. is is done by calculating the "real" productivity per employee less the average cost of each employee. If the profit per head is relatively high for your industry, that re- ward is working effectively. In looking at four global beer manufacturers, when it came to economic profit per employee, Hay Group found the highest was $60,000, the average was $30,700 and the lowest was $10,900. is shows organizations can generate five to six times more return on reward than competitors, even if they compete in the same markets with similar products and jobs. High economic profit per em- ployee could be a good sign as em- ployees are being very productive. But this could also signal levels of productivity are unsustainable and more staff are needed. Employees can only "overproduce" for so long without burning out, reducing their efforts or leaving, resulting in high turnover. Retention rate met- rics, the cost of turnover and staff morale should be monitored in tandem with profit per employee. On the other hand, low eco- nomic profit per employee sug- gests there may be too many em- ployees and current work levels could be maintained with fewer staff or a change to structure. Banking on profit Before the recession, spending on personnel expenses rose sharply at many of the world's leading banks. Since 2009, banks have made an effort to reduce person- nel expenses in relation to profit- ability; in other words, increasing employee productivity while con- trolling reward spending. A useful metric for measuring the relationship between reward spending and profitability is the ratio between personnel expenses and the organization's net income — the net profit or bottom line. A falling ratio means the bottom line is increasing more rapidly than personnel expenses. is means each additional dollar spent on employees is increasing net profit by more than one dollar. In contrast, an increasing ratio means personnel expenses are increasing more rapidly than the bottom line. is is a likely short- term outcome if you're increasing the dollars spent on workers to increase retention. Many banks have successfully reduced employee expenses rela- tive to productivity. Ratios at large Canadian and American banks have followed similar trends over the past five years and while these banks spend more on rewards relative to net income than global counterparts, the gap between the ratios has diminished since 2009. Sector variations Knowing how much is spent on rewards in relation to overall op- erating expenses helps to reveal how much to adjust pay before it starts to affect profitability. is ratio varies by sector as sectors that rely more heavily on employ- ees to create value (relative to oth- er inputs, such as workspace or of- fice supplies) spend more on per- sonnel relative to other operating expenses. Sectors that rely more heavily on other inputs (such as oil and gas refineries) spend relatively less on employees. When pay is as high a percent- age of total operating expenses as in support services, controlling levels is critical. Small increases could destroy company profit- ability while small savings might boost it greatly. In sectors with lower ratios, there's more latitude to increase reward spending be- fore profitability is affected. ere is no ideal ratio — it's about taking the median ratio for your sector as a rough guideline for the ratio your organization should aim to achieve. 10 checks e best way to check how well reward programs are working is a mix of tangible metrics, such as the number of employees, and intangible measures, such as em- ployee motivation. Here are 10 checks to get the best reward "fit": do the rewards reflect your business strategy? e business strategy should inform the com- pensation and reward philosophy as well as how much turnover an employer is willing to accept. If employees aren't behaving in a way that's expected, there may be misalignment between the re- wards and business strategy. how do the total costs of your package compare with the com- petition? If competitors are get- ting more out of employees than you are, you could be spending too much — or not wisely enough. Are you paying for rewards em- ployees don't use or care about? Take a look at the reward package being offered and compare it to the needs and wants of employees. do you have more employees than your competitors? You may have too many full-time employ- ees (FTEs) or larger operations than your competitors — or both. Fewer employees (relative to or- ganization size) than the compe- tition could result in burnout or high turnover. It's important to consider FTE count in conjunc- tion with related metrics. Are employees in the right grades for their work? Different grades are associated with differ- ent reward levels. Having people in the right grades helps to ensure the effort-reward ratio makes sense for both employees and the organization. It also helps to en- sure internal equity. Are employees motivated by their rewards? Employee surveys measuring engagement and en- ablement are a good way to check the pulse of employee motivation. Regular check-ins with managers and monitoring of turnover rates and exit interview data also help. do you have the right reward mix of fixed and variable pay? Market benchmarking — us- ing an appropriate comparator group — can show what kind of mix competitors are offering. Be sure to balance the data with what current and potential future em- ployees want and need. do the rewards suit the demo- graphic profile of employees? Employees with different ages, family situations and personal characteristics can have vastly different wants and needs. Are you paying for perfor- mance? Structuring employee compensation to put a focus on performance can help increase productivity and communicate an organization's values to employ- ees. Make sure the compensation structure aligns with the manage- rial strategy and types of behav- iour you want from employees. have you risk-tested your policies? Rewards are associated with a level of risk. For instance, all employees could hit their stretch targets and be eligible for maxi- mum performance payouts — or the organization could have a terrible year and employees may be unsatisfied with the resulting effort-reward ratio. It's important to stress-test reward programs to see if they deliver results and are within budget, given the array of scenarios a business might face. do you regularly review the effectiveness of rewards? Check to see which rewards are most and least used and which rewards people love and hate. As employ- ees change and grow, so should the reward programs. David Hoad is a senior consultant in Hay Group's reward practice and Na- thalie Olds is an analyst in Hay Group's reward practice in Toronto. Hoad can be reached at david.hoad@haygroup. com and Olds can be reached at nathalie.olds@haygroup.com. Credit: Ivelin Radkov/Shutterstock By providing information operations- focused leaders can relate to, HR ensures its place at the table.

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