Data can be overwhelming. If you have more than 50 workers’ compensation claims per year, you likely have lots of numbers. Industry leaders frequently talk about using data for various metrics. That sounds great, but what should you measure? How should you measure? And, most importantly, how do you use these metrics for real value?
What’s important is to understand how to use the metrics to tell a story — to see the trends in your program, determine the financial impact and target areas that need improvement. Ideally, you can show upper management that your efforts and the resources expended to improve the workers’ compensation program are worthwhile. Using a fairly simple formula mixed with a little finesse can help you interpret the meaning behind the data you are collecting.
There are many metrics you can use to improve and show the value of your workers’ compensation program. But that doesn’t mean you need to use all of them. What is important is to select one that helps you tell your story.
Cost per FTE
A metric called Cost per Full-time Employee (FTE) is one of the more powerful and popular among many organizations to see the value in their workers’ compensation programs. It is not appropriate for every company, however. Businesses with fewer than 50 claims per year and/or those with guaranteed cost programs may find other metrics are more suitable.
Determining the Cost per FTE can provide tremendous insight into your program. From it, you can show:
- Average cost per injured worker
- Aggregate costs for injured workers
- Trends in the costs over several time periods
- Which company divisions are spending more or less on injured workers
- Savings to date from the program
- Projected savings to the FTE goal
The formula to determine the Cost per FTE is fairly simple.
(Incurred losses x 2000)/productive man hours = Cost per FTE
- Incurred losses = the amount paid per claim + amount reserved for medical and wages + any expenses.
- The number ‘2000’ equates to the number of hours a Full Time Equivalent employee works per year (40 hours per week x 50 weeks).
- Figures for productive man hours should be available through HR or the payroll personnel.
All figures should be for the same time period; such as January – December of a particular year.
As an example, let’s say a company with 2,500 employees has incurred losses of $1 million. To determine the top portion of the equation:
$1 million (incurred losses) x 2000 = $2 billion.
To figure the number of man hours, take the number of FTE employees multiplied by 2000 hours:
2,500 x 2000 = 5 million.
The Cost per FTE for this time period would be $400. ($2 billion/5 million = $400).
To get the most out of the metric, do the same exercise for at least three specific time periods for the organization as a whole, and for separate divisions within the company. Laying out the numbers on an excel spreadsheet helps you tell a story that becomes extremely meaningful.
Tell a Story
There are several ways that the Cost per FTE can be of value to your organization.
- Compare to national benchmarks. The Risk Insurance Management Society (RIMS), for example, publishes an annual survey by industry. Comparing the Cost per FTE of your industry with that of your organization gives you an idea of how you are doing compared to the national average.
- Compare divisions within your own company. Looking at the Cost per FTE for each division of your organization will tell you which are doing a better job with their workers’ compensation programs. Where one division’s Cost per FTE may be $400, another may be $500, and another could be $325. Using the information enables you to create a ‘worst to best’ list, which you publish for the entire organization. Not only will senior management be able to see which divisions are doing better (or worse), but the division leaders will too. That can be a tremendous motivating factor for those divisions at the ‘worst’ section of the list.
- Demonstrate savings to date. This is especially effective if you have been ramping up your workers’ compensation program — focusing on return-to-work efforts, improving safety, working closely with adjusters, for example. The numbers for the different time periods show a trend.
To do this, multiply the Cost per FTE for each time period by the number of employees. For example:
The Cost per FTE in the first time period was $400. That, times 2,500 employees = $1 million.
If you had the same 2,500 employees for the next time period, but the Cost per FTE was lower — say $350 — the overall number will be reduced. 2,500 x $350 = $875,000.
Savings to Date: $1 million – $875,00 = $125,000
If the Cost per FTE for the most recent time period was lower still, the number would be decreased further. That adds up to major savings to a company’s bottom line.
This metric resonates most with senior management when it is presented as simply as possible — on a single page, in an easy-to-read excel sheet, with the overall savings highlighted at the bottom. Ultimately, it shows that the workers’ compensation program is not a drain on the bottom line, but an actual profit center.
Organizations can see significant savings on their workers’ compensation programs when efforts are made to improve the overall functioning. But senior management needs to understand the return-on-investment. Showing how much the company has saved through the efforts demonstrates the true value of an efficient, well run workers’ compensation program.
Author Michael Stack, CEO Amaxx LLC. He is an expert in workers’ compensation cost containment systems and helps employers reduce their workers’ comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is a co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder & lead trainer of Amaxx Workers’ Comp Training Center.
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