Average total wage expense, including benefits, per full-time equivalent employee.
Total compensation expense / FTE
Total Compensation Expense per FTE indicates the average total cash and benefits paid to a full time equivalent employee over the reporting period. Wage expenses represent an investment in the organisation’s human capital. Productivity is expected as an output for that investment.
Wage expense 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 generally consider wage and benefits to be the most important component of the employment offer, followed by development and work environment, work-life balance and organisation environment. Five of the most important attributes of employment, as perceived by employees, are related to wage and benefits.
For these reasons, most employers keep a close watch on wage expenses to monitor trends and ensure that those trends are consistent with competitive labour market realities and desired labour shifts but do not represent ‘expense creep’.
For example, an employer might expect wage expenses to rise if aiming to attract more experienced or more highly skilled employees, or if the labour market is becoming more competitive. In the absence of these driver s, increasing results for this measure might simply indicate the organisation is poorly managing this expense.
For greatest accuracy, organisations should source wage data from payroll data tables, categorising pay codes into base, variable, overtime and other benefits. If necessary, organisations may approximate some direct wage types using salary fields and bonus potential fields within employee job records.
Employers often analyse Total Compensation Expense per FTE by location, job family and occupation to monitor trends in key skill areas, areas of severe talent competition and highly-paid job areas. Organisations may also analyse this measure by organisational unit to help monitor units’ operating expenses and compliance with wage fixing philosophies and policies.
This measure does not indicate how closely wages match market wages or how satisfied employees are with wages. While it does offer opportunities to view trends over time in wage spending, it does not provide a relative view of how wage compares to other operating expenditures.
In setting targets related to wage expenses, organisations must consider their own wage fixing philosophies, labour market trends, workforce composition and skill mix, and future workforce planning to meet future business needs. An organisation might set relative targets for Total Compensation Expense per FTE based on how they expect these factors differ for other employers.
For example, an employer aiming to provide much higher wages 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.