Description
Average annual salary, excluding bonuses and other non-wage compensation, per full time equivalent employee (FTE).
Formula
Total annual salary / FTE
Interpretation
Average Annual Salary per FTE indicates the average base salary of a full-time equivalent employee, not including bonuses or commissions. While not a measure of the total dollars paid to employees, this measure provides a general indication of salary levels and trends.
Compensation expenses represent an investment in the organisation’s human capital, and Average Annual Salary per FTE measures a significant piece of that investment.
Compensation is usually a major, if not the largest, operating expense item in an organisation’s income statement.
However, it is often difficult to assess an appropriate market value for human capital despite its importance to business operations. In addition to its importance to the bottom line, employees
consider base pay to be the principal attribute of an organisation’s employment offer. In general, employees consider compensation and benefits to be a more important component of the employment offer than development and work environment, work-life balance and company environment.
For these reasons, most employers keep a close watch on salaries and other compensation expenses to monitor trends and ensure that those trends comport with competitive labour market realities and desired labour shifts but do not represent ‘expense creep’.
For example, an employer might expect salaries to rise if it aims to attract more experienced or more highly skilled employees or if the labour market is becoming more competitive. Absent these drivers, increasing results for this measure might simply indicate the organisation is poorly managing this expense.
Average salary can sometimes serve as a more useful and practical representation of compensation costs for managers than Total Compensation Expense per FTE or a similar measure, for two reasons.
First, employees value base pay over bonus or other compensation types.
Second, base salary is universally understood because of its personal importance to employees, while metrics consumers may find it more difficult to develop a reference point for total compensation.
Data Sourcing
Organisations typically source annual salary data from an HRIS field listing employees’ base salaries. Alternatively, organisations may source this data from payroll tables by identifying the compensation codes for salary payments.
Analysis
Organisations frequently analyse Average Annual Salary per FTE by job family or job type to monitor trends in key skill areas, areas of severe talent competition and highly-paid job areas. Analysis may also be useful by organisational unit to help monitor units’ compliance with compensation philosophies and policies.
Additionally, organisations may analyse by characteristics such as organisation tenure, performance rating, age, gender and ethnic background to understand salary variations among employee groups and monitor compliance with diversity initiatives.
Limitations
This measure does not indicate how closely compensation matches market compensation or how satisfied employees are with their salaries.
While it does offer opportunities to view salary trends over time, the measure does not provide a relative view of how compensation relates to other operating expenditures.
Targets
In setting targets related to salaries, organisations must consider their own compensation philosophies, labour market trends, workforce composition and skill mix, and workforce planning to meet future business needs.
An organisation might set relative targets for Average Annual Salary per FTE based on how they expect these factors differ for other employers.
For example, an employer aiming to provide much higher salaries than its talent competitors to better attract and retain talent might target moving results toward the 75th percentile among those talent competitors. An employer aiming to shift offices to low-cost locations over time may aim to move results below the median as compared to industry competitors.