Building Unified Financial Visions

It’s probably the biggest expense on your P&L. Most of it may be in the common line item “Salary and Benefits.” But it needs to contain everything you invest in your people, along with the required associated expenses (e.g., payroll taxes). We call it TRI for Total Rewards Investment.

And we do try to think of it as an investment—one that produces a return. I talk about this a lot with clients and most of them nod and agree—for a moment at least. But I have a hard time getting them to think seriously about the need to measure the return on that investment.

Imagine how big that number is for your business or for any business. I’ve observed that it can range from 40 to 60% of gross profit. My partner Ken has blogged here about our formal process for measuring the return. But there are many ways to do so—profit per employee, etc. Whatever the measure it’s important to account for the return on the TRI.

Sometimes overlooked is the need to consider the efficiency of the investment. Consider each element—salaries and wages, bonuses, retirement plan contributions, benefit plan commitments, and so forth. Each one of these has some degree of inefficiency. It might be found in an under-utilized benefit area, a legacy compensation arrangement or the fees in your 401(k) plan (a huge area of redundant expenses).

My point is that this huge commitment, the TRI, can be improved in two different ways—(1) utilizing the elements of pay in the most productive fashion to generate stable profits and (2) eliminating wasted costs.

I’ll lay out some specifics on these in my next blog(s).