When building our compensation management for coming cycles, we have a lot to think about: cost of living increases, recruitment needs, retention issues, and organizational budget changes. We have to balance our growth plans with organizational realities, and while we may want to full our teams with senior talent, we have to make sure it’s a financial possibility.

Compensation expense factor is the metric that will determine the present and future of your compensation management processes. While compensation is often an organization’s most significant expense, it doesn’t dictate the organizational budget; compensation expense factor shows you the proportion of your organization’s budget is dedicated to employee compensation.

Let’s discuss:

  • How to calculate compensation expense factor
  • The impact of compensation expense factor on your compensation planning

How to calculate compensation expense factor

There are two ways to calculate compensation expense factor: wage-based and overall expense.

To calculate wage-based compensation expense factor, take the total compensation amount and divide it by your organization’s total operating budget. That number is the percentage of your operating expenses dedicated to compensation.

A more comprehensive look at compensation cost encompasses all compensation-related costs, including salaries, benefits, stock options, recruiting costs, and payroll taxes. These costs, divided by your organization’s total operating budget, will help you understand the holistic, all-encompassing cost of recruitment and retention and its impact on your budget.

The impact of compensation expense factor on your compensation planning

We can’t kick off our compensation management without understanding how much money we have to spend. Calculating compensation expense factor needs to come before any other step in the compensation planning process.

Compensation expense factor gives us insight into what we can do in the future to recruit and retain talent. We know that compensation and benefits are top priorities for employees, and especially in these trying times, it’s important to do what we can in order to keep employees happy and engaged.

Retention and recruitment, however, are not the only factors involved in planning compensation management. Compensation planning has to be based in financial realities, so calculating compensation expense factor has to be the first step in planning smart compensation packages.

Compensation planning can be simple

Comprehensive compensation management is critical to the organizational function and doing it without organized processes can cost your organization unnecessary money and time. Simple compensation management is possible: using HR tech, you can turn a stressful process into one based on rewards and needs.


From Shayna Hodkin

Shayna lives in south Tel Aviv with two dogs and a lot of plants. She writes poems and reads tarot.