Benefit to compensation ratio calculations

As an essential building block of the compensation formula, benefits ratios will differ among Engineering,
supervisors/staff and hourly wage earners such as production personnel. The basic formula for all three is:

(Averaged benefits + “perks” + bonuses) divided by (Averaged hourly wages for one year)

Use the "BR" benefit ratio in Line 16 for worksheets computing absenteeism, employee turnover and
productivity costs. Hypothetical numbers were used to demonstrate this worksheet. Left-click on the white
cells in the far-right column and enter your own numbers to find your organization's compensation/ benefits
costs. The peach-colored results cells will automatically calculate and display the ratios.
Line
1 ES Average engineer's salary, annual $43,000.00
2 Insurance costs: Life, medical, dental, disability per year $7,400.00
3 Bonuses, stock options, other incentives value per year $2,800.00
4 Retirement plan: maintenance and contributions costs per year $3,200.00
5 EB Engineer benefits ratio 31%

6 SS Average staff/supervisor salary, per year $-

7 Insurance costs: Life, medical, dental, disability per year $-
8 Bonuses, stock options, other incentives value per year $-
9 Retirement plan: maintenance and contributions costs $-
10 SB Staff/supervisor benefits ratio #DIV/0!

11 PS Average production personnel wage, per hour $-

12 Insurance costs: Life, medical, dental, disability per year $-
13 Bonuses, stock options, other incentives value per year $-
14 Retirement plan: maintenance and contributions costs $-
15 PB Production personnel benefits ratio #DIV/0!

16 BR Benefit ratio, averaged organization-wide #DIV/0!

Compensation cost calculations

Salaries, wages, benefits ratios and compensation costs per hour have been automatically entered into
lines 17-25 and calculated to hourly figures, using figures entered into lines 1-16.

Use the compensation costs EC, SC and PC (automatically calculated and shown in the yellow cells) when
calculating the cost of poor quality and its effects on profits in Worksheet 2.
17 ES Average engineer's salary, hourly $20.67
18 EB Engineer's benefits ratio, from line 5 31%
19 EC Engineering staff compensation cost per hour, averaged $27.12

20 SS Average supervisor salary, hourly $-

21 SB Supervisor benefits ratio, from line 10 #DIV/0!
22 SC Supervisor compensation cost per hour, averaged #DIV/0!

23 PS Average production personnel wage, per hour $-

24 PB Production personnel benefits ratio, from line 15 #DIV/0!
25 PC Production personnel compensation cost per hour, averaged #DIV/0!
 Charting effects of change in quality

This series of tables tracks time costs as they were defined in Worksheet 1, and adds them to the cost of
Engineering Review, rework, replacing items on warranty and scrap costs.

At least one set of measurements is taken before any efforts to change a process or policy are made. After a
change is made to a process or policy, the subsequent measurements are compared against the baseline. Keeping
in mind that trends--gradual change--are more valuable as they accurately represent changes, a series of at least
five or six measurements should be taken for assessment.

If you want to track the cost savings of one recurring problem, you can use the totals to assess Return on
Investment (ROI).

Keep your methods for recording numbers of rework, scrap etcetera consistent! This helps ensure the results
convincingly represents the effects of strategic change.

Worksheet 2. Step 1
Line Personnel time Code Value

1 Engineering compensation per hour EC $27.12

2 Engineering hours lost per event E 0.25

3 Supervisor compensation per hour SC $15.25

4 Supervisor hours lost per event S 0.50

5 Personnel compensation per hour
Monthly/cycle sales-to-profit ratio
6 Sales, per month or cycle
7 Profit, per month or cycle
Material rework costs
8 Scrap costs
9 Warranty item replacement costs
10 Shipping warranty product costs
11 Concessions costs to customers
EC $10.10 Instructions for using this worksheet
Only enter data in the pastel colored cells (not the
Value dark red title cells)! The white cells automatically
calculate data as you enter it, and send the calculated
$15,950
data to tables for automatically generating charts and
graphs. Follow the instructions in this yellow block to
enter, line by line, the data needed to assess results.
$2,350
Line 1: Enter the figure from the blue cell EC on Line
19 in Worksheet 1.
Value
Line 2: Enter the average amount of time, in decimals
$60 (.25 equals 15 minutes) for each Engineering Review
(assessment of failed product).
$20
Line 3: Enter the figure from the blue cell SC on Line
22 in Worksheet 1.
$1
Line 4: Enter the average amount of time, in decimals,
$- (.5 equals 30 minutes) for providing guidance and
oversight in rework to production personnel.

Line 5: Enter the figure from the blue cell PC on Line

25 in Worksheet 1.

Line 6: Enter your organization's sales for the month or

cycle.
 Line 3: Enter the figure from the blue cell SC on Line
22 in Worksheet 1.

Line 4: Enter the average amount of time, in decimals,

(.5 equals 30 minutes) for providing guidance and
oversight in rework to production personnel.
12 Waste: materials used to correct defects $5
Line 5: Enter the figure from the blue cell PC on Line
25 in Worksheet 1.
13 Other $1
Line 6: Enter your organization's sales for the month or
14 Other $1 cycle.

Line 7: Enter your organization's profit for the month or

15 Other $1 cycle.

16 Total material costs $89.00 Line 8: Enter the cost for scrapped items where
defects were found in-facility.
Time costs for poor quality Hours Value Line 9: Enter costs of items replaced for customers
through warranty claims.
17 Number of production hours for rework 7 $71
Line 10: Enter costs of shipping for items replaced
through warranty claims.
18 Number of rework events 2
Line 11: Enter costs of concessions to customers
19 Engineering time 0 $14 to resolve quality issues.

20 Supervisor time 1 $15 Line 12: Enter the amount of waste: materials
used to rework products.

21 Total time costs $100 Lines 13 to 15: Enter the name, and values of other
identified material costs of poor quality.
Line
Line 17: Enter the number of hours production
personnel spent reworking and reshipping products.
Computing Return on Investment (ROI)
Line 18: Enter the number of rework events,
either singly, or in groups or production runs.
Time spent on correcting causes Hours Value
Line 22: Enter the number of hours engineers used
22 Engineering 0 $- to resolve production rework problems, including
preparing, delivering and assessing results of training.
23 Supervisors 0 $-
Line 23: Enter the number of hours supervisors
used to resolve production rework problems,
24 Production personnel 0.06 $1 including time preparing for and delivering training,
and for assessments.
25 Total $1
Line 24: Enter the number of hours that production
personnel used to resolve production rework
Other costs of correcting causes Value problems, including time in training, and for
assessments.
26 Equipment $1
Line 26: Enter the amount spent on equipment:
new, used, or for repairs, to resolve production rework
27 Materials $1 problems.

28 Other $- Line 27: Enter the amount of materials used for

resolving production rework problems, including
training materials.
29 Other $-
Lines 28 and 29: Name and enter other costs for
resolving production rework problems.
 new, used, or for repairs, to resolve production rework
problems.

Line 27: Enter the amount of materials used for

resolving production rework problems, including
training materials.

Lines 28 and 29: Name and enter other costs for

30 Total $2 resolving production rework problems.

Worksheet 2. Step 2
Enter data in the colored cells within this table at the end of each month or cycle. Begin by naming the month or
cycle in the top row. Then enter the totals from the corresponding lines from the worksheet above: the left column
lines numbers match. Graphs and charts will automatically express the data as it is being entered.
Line

Mo/cycle Mo/cycle Mo/cycle Mo/cycle Mo/cycle Mo/cycle

Factors 1 2 3 4 5 6 Average
6 Sales $12,500 $12,875 $13,858 $14,050 $14,750 $15,950 $13,997
7 Profit $1,250 $1,257 $1,488 $1,650 $1,850 $2,350 $1,641
Sales-to-profit ratio 10% 10% 11% 12% 13% 15% 12%

8 Scrap $325 $275 $254 $202 $140 $60 $209.33

9 Warranty $300 $275 $250 $175 $75 $20 $182.50
10 Shipping $20 $20 $15 $10 $5 $1 $11.83
11 Concessions $25 $20 $10 $10 $2 $- $11.17
12 Waste $55 $40 $30 $25 $4 $5 $26.50
13 Other $12 $10 $10 $10 $1 $1 $7.33
14 Other $12 $10 $10 $5 $1 $1 $6.50
15 Other $11 $11 $5 $5 $3 $1 $6.00
16 Total material costs $760 $661 $584 $442 $231 $89 $461.17
17 Production time $858 $780 $650 $585 $450 $71 $565.67
19 Engineering time $152 $150 $140 $120 $80 $14 $109.33
20 Supervisor time $98 $90 $98 $90 $25 $15 $69.33
21 Total time costs $1,108 $1,020 $888 $795 $555 $100 $744.33
Total cost of poor quality $1,868 $1,681 $1,472 $1,237 $786 $189 $1,205.50

25 Time spent on correcting causes $190 $125 $25 $25 $10 $1 $63
30 Other costs of correcting causes $585 $150 $85 $50 $- $1 $145
Total costs to correct quality problems $775 $275 $110 $75 $10 $2 $208

Return on investment 3.19 to 1

Do not enter data in these cells! They automatically calculate, and send to the chart below, data
that has been entered in the table above.
Month/cycle Quality costs Sales Profit Profit ratio
Mo/cycle 1 $1,868 $12,500.00 $1,250 10%
Mo/cycle 2 $1,681 $12,875.00 $1,488 10%
Mo/cycle 3 $1,472 $13,858.00 $1,650 11%
Mo/cycle 4 $1,237 $14,050.00 $1,850 12%
Mo/cycle 5 $786 $14,750.00 $2,350 13%
Mo/cycle 6 $189 $15,950.00 $2,350 15%
 Month/cycle Quality costs Sales Profit Profit ratio
Mo/cycle 1 15% $12,500.00 $1,250 10%
Mo/cycle 2 13% $12,875.00 $1,257 10%
Mo/cycle 3 11% $13,858.00 $1,488 11%
Mo/cycle 4 9% $14,050.00 $1,650 12%
Mo/cycle 5 5% $14,750.00 $1,850 13%
Mo/cycle 6 1% $15,950.00 $2,350 15%

Quality costs and profit

$2,000 $2,500

$1,750 $2,250
$2,000
$1,500
$1,750
$1,250 $1,500
Profit
$1,000 $1,250
Quality costs
$750 $1,000
$750
$500
$500
$250 $250
$- $-
Mo/cycle 1 Mo/cycle 2 Mo/cycle 3 Mo/cycle 4 Mo/cycle 5 Mo/cycle 6

Quality costs and profit as percent of sales

16% 16%

14% 14%

12% 12%
Percent of sales

10% 10%
Profit ratio
8% 8%
Quality costs
6% 6%

4% 4%

2% 2%

0% 0%
Mo/cycle 1 Mo/cycle 2 Mo/cycle 3 Mo/cycle 4 Mo/cycle 5 Mo/cycle 6

Itemized material costs of poor quality

$325
$300
$275
Scrap
$250
$225
Warranty
Shipping
l costs

$200
$175 Concessions
Waste
 Itemized material costs of poor quality
$325
$300
$275
Scrap
$250
$225
Warranty
Shipping
Actual costs

$200
$175 Concessions
$150 Waste
$125 Other
$100 Other
$75 Other
$50
$25
$-
Mo/cycle 1 Mo/cycle 2 Mo/cycle 3 Mo/cycle 4 Mo/cycle 5 Mo/cycle 6

Costs of poor quality in personnel time

$900
$800
Actual compensation costs

$700
$600
Production time
$500
Engineering time
$400 Supervisor time
$300
$200
$100
$-
Mo/cycle 1 Mo/cycle 2 Mo/cycle 3 Mo/cycle 4 Mo/cycle 5 Mo/cycle 6