You know that getting compensation right is essential to your company’s growth. You’ve done some work already to understand the benefits of using market data and compensation management software. Yet, you’re not the only person on the buyer committee. You still need to make a business case to your CFO or CEO and show them the expected ROI of compensation software.
What does your CFO want to know before they invest in compensation management software? And how do you frame the benefits of comp software in terms that resonate with them? These are the questions we will answer in this article.
CFOs Are Playing a Greater Role In the Growth Strategy of an Organization
To be able to speak your CFO’s language fluently, it’s key to understand the roles they play in your organization and how their roles are evolving. While CFOs have traditionally been the stewards of an organization’s assets and resources, their roles are expanding dramatically.
Today, it’s increasingly important for CFOs to be strategists. They are expected to help shape the growth strategy and direction of the business, and instill a financial approach and mindset throughout the organization to help other parts of the business perform better.
To understand how the CFO role is evolving, Deloitte’s second-quarter 2018 CFO Signals survey, asked CFOs a series of questions about their scope of responsibilities and the roles they brought to their organization. What the survey found is that many CFOs appear to be taking on broader responsibility for business planning, IT/data, and enterprise risk management:
- More than half of CFOs said they are responsible for enterprise risk management, with 35 percent saying that the function reports directly to them.
- CFOs also said that risk-related responsibilities are among the most likely to be added to their responsibility scope over the next three years, behind IT, and strategy and planning.
The same survey asked CFOs: “What external and internal risks worries you the most?”
Results show that concerns about talent is at the top of list: “With CFOs citing growing struggles to executives on initiatives supporting their growth strategies, their focus on talent acquisition, quality, and retention further intensified.”
us-cfo-signals-2q18-full-report [Deloitte CFO Signals, Q2 2018]
Framing the Conversation
When discussing your compensation initiatives and proposal for comp software, it’s key to frame your story from the perspective of driving growth and managing risks. After all, those are the things your CFO cares about. Here’s a framework to work with:
- What risks could your organization run into, if your organization did not have appropriate oversight over compensation?
- What are the costs of getting compensation wrong, from a talent perspective and a growth perspective? What are the benefits of getting pay right?
Pay Equity: A New Source of Risk
In the last couple of years, gender/racial equity has become a significant source of enterprise risk, due to a combination of forces at play.
First, closing the pay gap between men and women is a top target in the EEOC’s Strategic Enforcement Plan, and a priority for state legislators. Equal pay laws are spreading at the state and local level. At this time, 47 states have at least gender-specific statutes; 11 states have banned employers from asking about candidates’ salary history, and that number is likely to keep growing. Meanwhile, some states have also included pay transparency provisions that would allow employees to openly discuss wages.
Second, workers today are much less willing to put up with poor treatment. In 2018, employees of major brands organized large-scale public protests and/or initiated lawsuits after experiencing gender-based pay inequities. Nike, BBC News, and Google have all faced reputation crises after employee protests over unequal pay between men and women. Ex-employees of Nike, Google and Spotify have filed lawsuits against their employers over gender-based discrimination and equal pay violations.
Pay equity issues pose multiple sources of risks. First, it poses a retention risk. If your employees don’t perceive that you’re proactively trying to make things fairer for women and people of color (POCs) – by paying equitably and fairly – they’re more likely to leave. This is true for both male and female employees.
Second, when employees leave due to perceived unfair pay practices, they may review your company online and make their dissatisfaction public. This practice can damage your corporate reputation and your employer brand, which impacts your ability to attract new talent, to ship products and to serve and retain customers. In the worst case scenario, employees may take legal action against your organization for gender or race based discrimination and equal pay violations.
Pay equity issues are easier and less costly to prevent than to fix. One of the best ways to prevent pay equity issues is to benchmark your jobs to the market, develop robust salary ranges and guidelines around the pay increase process and then stick with your ranges. Equally, important, you’ll want to make sure your employees know about those policies once they’re in place. All of these are things that modern compensation software (PayScale products) can support.
Within PayScale software, we have pre-defined reports to help HR professionals identify trends in their workforce including differences in pay between different segments of workers, such as men versus women. You will have all the analytical tools you need to address these questions around pay equity and share findings with stakeholders in your organization.
How Compensation Impacts Talent Acquisition, Performance, Retention and Your Bottom Line
Payroll is typically the largest expense for organizations. The costs of underpaying or overpaying can be quite detrimental to a business.
Nowadays, candidates do their own salary research online and come to interviews with clear expectations on what they should be paid for a given role. Some may even ask your recruiter for the salary range for the role. At this time, it is imperative for organizations to make pay decisions based on market data and to develop a coherent compensation philosophy that can be articulated to candidates and employees.
There are a lot of elements that should go into creating an offer, including your compensation philosophy and strategy -aligned with your business objectives, your comp budget, your pay ranges, your unique labor market, the job’s responsibilities, the candidate’s individual skills, education and experience.
Modern compensation software helps organizations instantly access fresh market data, filtered by and aligned with all of the above elements. It also helps managers and recruiters create more accurate job descriptions. For example, PayScale’s software products surface closely related job descriptions based on key elements of a job (market, title, core skills, certifications, etc.) for fast, rich and accurate job listings.
All of this combined helps ensure that you are able to target the right candidate profile, leading to quicker hiring cycles, higher offer acceptance rates and reduced turnover due to compensation being in line with the market.
According to PayScale commissioned report from Forrester, “The Total Economic Impact of PayScale” (TEI report) explains, the “three-year present value of this benefit is nearly 2.1 million”. This is modeled off of a composite organization based on interviews with PayScale customers of varying sizes and industries.
Read the full TEI report to see the cost savings and business benefits enabled by PayScale Compensation Management platform.
PayScale’s research shows a solid link between fair and transparent pay practices and overall job satisfaction. In 2018, we conducted a new survey asking employees to tell us the primary reason for leaving a job. Wanting a bigger paycheck is the top reason people quit their jobs, well ahead of professional advancement.
Furthermore, we’ve found that it’s not enough to pay people well. In addition, the rationale behind pay decisions need to be communicated. When employees don’t have information on why they’re paid the way the do, they’re most likely to come to the conclusion that they’re underpaid.
What does turnover really cost when you consider all of the costs associated with turnover — including interviewing, hiring, training, lost productivity, lower morale and lost opportunity costs?
Losing an employee can cost anywhere between 40 percent to 400 percent of their annual salary, depending on the seniority of the role. An ERE Media article modeled out what happens when a business loses 12 employees in one year: it puts the cost to replace just 12 employees at upwards of $1.5 million, due to these costs mentioned above. Even if you don’t agree with these specific numbers, the key point is one that your Finance team can agree with: it costs less to retain than it does to replace.
How does modern compensation software help with retention? When you use compensation software, you can understand in real-time how jobs are priced in the market, speeding review cycles by identifying potential issues quickly, such as employees who are paid well below the median market pay for their position. This improves transparency with recruits and employees. In turn, this helps reduce turnover caused by underpayment or poor communication around compensation.
Compensation acts as the foundation for high performance: when employees feel that they’re underpaid, you can bet that they are not giving you 100 percent. On the flip side, if you ensure competitive base pay, and link pay to performance with well-designed incentives or results-based increases, you can boost performance dramatically.
Modern comp software allows HR professionals, managers and employees to be involved in decisions that impact an employee’s pay. Users can apply any kind of performance metrics they use inside their company and streamline the increase-cycle process with collaboration tools. For example, PayScale provides a place for HR to recommend pay increases to managers. Managers can adjust performance ratings and recommend promotions for high performing employees and communicate easily with HR about why they’ve made the changes or recommendations.
After pay decisions are finalized, PayScale provides tools that allow managers to better communicate compensation with employees and the transparency level defined by the organization.
Efficient Use of Compensation Dollars Impacts Your Bottom Line
Each of the factors we mentioned above ends up impacting the bottom line. Compensation is tied directly to your revenue. PayScale can help you improve talent acquisition, reduce turnover, increase performance, ensure equity and fairness, empower HR, save on payroll and safeguard — even boost — your bottom line.
Need help to get your comp on the right track? Let’s talk.