How to Prove Compensation Planning Tools are Worth the Investment

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“The over-all point is that new technology will not necessarily replace old technology, but it will date it. By definition. Eventually, it will replace it. But it’s like people who had black-and-white TVs when color came out. They eventually decided whether or not the new technology was worth the investment.”  Steve Jobs

compensation costs

Many companies contact us, asking how to justify the costs of a new compensation planning tool.  Recently this has been coming from Suite software; the compensation modules are the weak link, and companies often come looking for a solution after 6 months, the time it takes to figure out the Suite’s compensation tool is weak.

Some are exhausted from the spreadsheet process they currently use, but they don’t know how to talk to management about the value of getting a more efficient system.

Compensation Planning Tools – Be Careful How You Define ROI

The fact is that many of the ROI calculations for these products use “squishy” logic, such as relating turnover to the compensation planning cycle.

Though we can see how turnover in the compensation department should be considered (“I’ll quit if I have to manage the compensation planning process again!”), it is harder to draw a direct connection between turnover and a poorly run compensation planning cycle.

Nevertheless, there are some genuine considerations that will make a difference to your management team. The most obvious is the time saved by managers who no longer have to work with spreadsheets and who are given better guidance through an online system.

For example:

  • Total Number of Managers: 500

  • Average Manager Salary: $70,000

  • Average Manager Hourly Salary: $33.65

  • Average hours saved per manager: 1.5

  • Total Cost Savings: $25,239

Then, of course, there’s the time spent by individuals in the HR department. How much time would be saved if there was no longer a need to consolidate spreadsheets, respond to manager requests for new spreadsheets because of changes in staff, etc.?

Look at the number of people involved and how much time each spends on this process. You can complete the estimate in the same way as shown in the example for managers.

Finally, if your organization has trouble getting managers to stay within the budget provided, the addition of an online tool may make a big difference.

We had one client who saved a million dollars in the first year because they were finally able to track the budget at every step of the process. If that’s the case with your group, add the potential “opportunity costs” of spending that money on merit budget versus investing it.