managing your largest budget item

The bottom line, when it comes to pay, is that compensation expenses must fit into the financial plans of the organization. Payroll, plus associated taxes and benefits, is the largest item in the budget in many industries and can range from 20% to 80% of expenses.  Surprisingly, organizations expend very little of their resources on actually managing and administering this huge cost.

Managing compensation is not payroll administration

Pay administration is not payroll administration – and for all the functions they perform, payroll service providers rarely have any expertise on how much to compensate employees.  ElementOne has thirty years of experience showing organizations like yours how to keep their payroll in line with their needs and the contributions of their employees.  Controlling the payroll budget helps to:

  • Avoid paying employees far more than their ability to contribute.
  • Ensure resources will be available to move entry-level employees to the right level of pay as they develop.
  • Eliminate starting new employees at rates higher than those of proven, long-serving employees in the same job.
  • Minimize turnover-related costs.

Fully structured pay management programs, using tools like job evaluation, market research, pay structures and performance management, make the pay administration process more objective.  An objective approach minimizes the risk of complaints and litigation, removes “banging on the door” as an approach for managers to get raises for their employees, and leads to fundamental fairness across the organization.

Some clients ask ElementOne to provide independent analysis and recommendations on job evaluation and pay grade assignments for new or changed jobs. We can serve in this role, evaluating jobs and reviewing the impact of changes to other jobs in functional areas.

Periodic updates of pay structures are essential to the long-term effectiveness of a compensation program. Structures should not be adjusted simply by some fixed percentage, but should include reviews of the labor market and realignment of the internal payline.

Budgeting for effective compensation over time

Finance professionals find the ElementOne approach to payroll budgeting far superior to simply relying on “last year plus X percent.”  The ElementOne pay structure approach changes payroll budgeting to a science and provides two levels of confidence:

  • The “fully mature organization” level of budgeting, which simply takes the number of individuals in each pay grade and multiplies it by the target rate, thus ensuring that the organization is providing a budget sufficient to attract, retain and motivate fully qualified and fully functioning employees in every job.
  • “Performance adjusted” budgeting, which takes into account each individual employee’s performance and assigns it to a rate within the range.  The sum of all individual pay targets provides for a budget exactly in line with the current roster of employees and their contributions.

Just as important as knowing what the payroll should be is the process of getting from where you are to where you need to be.  ElementOne can help you get there, designing strategies and models to move employee pay, over time, to where it ought to be, consistent with your pay philosophy and your overall approach to human resources management.