Organisations’ pay decisions narrowly focused on benchmarks, new survey by WorldatWork and Mercer shows. Many organisations’ pay decisions may be misguided or unbalanced as they spend too much time focused on external comparisons and not enough time looking internally to measure and assess the actual workforce and business impact of their total reward practices.

According to new research by WorldatWork and Mercer, most compensation professionals use techniques such as benchmarking among internal and external peer groups (95 percent and 90 percent, respectively) and ongoing reporting (87 percent) to make pay decisions in their organisations. Using more sophisticated analytical techniques such as projections, simulations and predictive modeling are significantly lower at 80 percent, 64 percent and 43 percent, respectively. Notably, this sizeable difference exists even though compensation professionals believe they have the ability and expertise to effectively use high-end analytics. More than two-thirds (67 percent) of participating respondents indicate that they possess the skill levels to perform sophisticated analytical techniques. The 2012 Metrics and Analytics: Patterns and Use of Value Survey, conducted in March by WorldatWork and Mercer, assesses how metrics and analytics are used in decision-making related to pay and talent. The survey includes responses from compensation professionals at 560 organisations in North America.

“The folks who determine how a company’s employees should be paid have always existed in a data-rich environment. But what we’re seeing now is the emergence of a whole new level of data and analytics around pay, and it’s happening very quickly. The key question is shifting from ‘what does the market say we should we pay this individual?’ to ‘what is the impact of this pay decision on the business?’” said Ryan Johnson, CCP, Vice President of Publishing and Community at WorldatWork. According to Wendy Hirsch, Principal at Mercer, “A disconnect exists between the abilities and outcomes of the comp function – comp professionals are relying heavily on less sophisticated techniques for pay decisions, yet clearly have the know-how to use more involved methods. More sophisticated analytics allow organisations to make better, more fact-based decisions. It’s ironic that a data-rich function like compensation would risk being ‘left behind’ as internal labor market analyses and fact-based decision-making become the norm in other areas of HR.”

Metrics and analytics
While 47 percent of participating respondents have one to two full-time employees responsible for HR-related analytics and three-fourths (76 percent) say their top executives and HR leaders have requested workforce projections, approximately half of compensation professionals say they lack confidence in data regarding education, competencies and investments in training. “In a true total rewards environment, key variables reflecting and affecting workforce capabilities like education levels, competencies, and training and development are absolutely necessary to determine the efficacy of rewards,” said Haig Nalbantian, Senior Partner at Mercer. “Organisations focusing only on the motivational aspect of rewards and neglecting the broader effect rewards have on securing the right workforce – what economists refer to as the ‘selection effect’ – are being short-sighted about the role of rewards in driving talent development and business performance. They’re missing half of the equation, sometimes the most important half.”

Going forward, compensation professionals recognize that more sophisticated analytics can provide them with greater insights into the effectiveness of their overall rewards strategy. According to survey findings, more than half (57 percent) of compensation professionals indicate they would like to be able to assess whether their rewards strategy effectively motivates and engages top-performing employees and to determine which elements of their rewards strategy effectively motivate top-performing employees. Other areas of interest include assessing critical drivers of employee retention (46 percent) and determining whether current sources of talent will fulfill future business needs (40 percent). See Figure 3.

“To effectively implement a total rewards philosophy, compensation practitioners must embrace a real culture of measurement – one that drives them to work with a broader set of data and utilize causal modeling methods powerful enough to address the complexity of the reward decisions with which they are charged,” said Mr. Nalbantian.