How to Benchmark Workers’ Comp Costs When Your Headcount Keeps Changing

Your workers’ compensation costs were higher this year than they were three years ago. That sounds like bad news. But what if your company had 3,500 employees three years ago and now has 11,000? What if the business completed an acquisition, entered new markets, or went through a major hiring period? Suddenly, comparing total workers’ comp costs from one year to another does not tell you very much.

As organizations change, their workers’ compensation measurements need to change with them. Two concepts can help employers make more meaningful comparisons: cost per full time equivalent employee and loss development. Together, they provide something every risk manager needs: a better apples to apples view of performance.

Why Total Workers’ Comp Cost Can Be Misleading

Imagine a company had 100 employees and later grew to 1,000. If its total workers’ compensation costs increased during that period, should management immediately conclude that performance deteriorated?

Not necessarily.

More employees create more exposure. Even a company with excellent safety and claims management practices may experience more total injuries simply because significantly more people are working.

The same problem appears after acquisitions. An employer might move from 3,500 employees to 11,000 in a relatively short period. Looking only at total claim dollars before and after the growth could make the workers’ comp program appear much worse than it actually is. The opposite can also happen. A company that reduces its workforce may report lower total workers’ compensation costs even though its underlying performance has not improved. Raw dollars need context.

Cost Per FTE Creates a Fairer Comparison

One way to add that context is to examine workers’ compensation cost per full time equivalent employee. Instead of simply asking how much the organization spent, this metric asks how much workers’ compensation cost for each equivalent employee. That distinction makes comparisons across different periods much more useful.

Suppose workers’ comp costs increased 30 percent, but the workforce grew 60 percent during the same period. Looking only at total cost could create unnecessary alarm. Cost per FTE gives management another perspective. It helps answer whether costs are actually rising relative to the size of the workforce. This is especially useful for organizations experiencing rapid hiring, acquisitions, downsizing, or other significant changes in headcount. It also gives leadership a metric that is easier to follow over time because workforce size is incorporated into the comparison.

Headcount Is Only Half the Problem

Normalizing for workforce size solves one problem, but there is another complication when comparing workers’ compensation years. Claims take time to develop. A claim that occurred several years ago has had more time for medical treatment, indemnity payments, litigation, and other costs to become known. A claim from a recent period may still be relatively immature.

Put those two claims next to each other without accounting for their different ages, and the newer claim can appear less expensive simply because it has not had enough time to develop. That can give employers a misleading impression of improvement. This is where loss development becomes important.

Why Loss Development Matters

Loss development factors help employers estimate how claims may change as they mature. Using NCCI averages as one way to account for this development. Larger employers may also have actuarial studies that provide more detail specific to their own experience. The important concept is not the actuarial calculation itself. It is understanding that a dollar of current claim value from a recent year is not necessarily comparable to a dollar from an older, more mature year.

If an employer ignores development, recent performance can look artificially favorable. Then, months or years later, those same claims continue accumulating costs and the apparent improvement disappears. Accounting for development helps create a more realistic view of the trend.

Put Workforce Size and Claim Maturity Together

This is where the analysis becomes much more useful. To compare one period with another, employers need to consider both the number of employees exposed to risk and the maturity of the claims being measured. Cost per FTE helps normalize for workforce size. Loss development helps address differences in claim maturity. Used together, they allow an employer to ask a much better question.

Instead of asking, “Did we spend more this year?” ask, “How is our workers’ compensation program performing after accounting for how much our workforce changed and how developed these claims are?” That is a far more meaningful management question.

Look Beyond One Number

Cost per FTE should not be viewed in isolation. Once a trend is identified, employers can look deeper to understand what is driving it.

Are there more claims?

Has average cost per claim changed?

Are reporting delays increasing?

Are return to work outcomes getting worse?

Are medical costs moving in the wrong direction?

The normalized cost tells you whether something deserves attention. The underlying metrics help explain what is happening. That distinction prevents management from reacting to a number without understanding the story behind it.

Better Comparisons Lead to Better Decisions

Workers’ compensation programs rarely operate in a static environment. Companies grow. Companies shrink. Employees are added through acquisitions. Business conditions change. Claims mature at different rates. Performance measurement has to account for those realities. Otherwise, leadership can end up celebrating improvement that did not really occur or trying to fix a program that is actually performing better than the raw numbers suggest.

Total workers’ comp cost still matters. It simply should not be the only number guiding the conversation. When headcount changes, normalize the comparison. When comparing claims from different periods, consider their development. The goal is simple: make sure you are comparing like with like. Because before you can decide whether your workers’ compensation program is improving, you need to know whether the numbers you are comparing are telling you the same story.

Michael Stack, CEO of Amaxx LLC, is an expert in workers’ compensation cost containment systems and provides education, training, and consulting to help employers reduce their workers’ compensation costs by 20% to 50%. He is co-author of the #1 selling comprehensive training guide “Your Ultimate Guide to Mastering Workers’ Comp Costs: Reduce Costs 20% to 50%.” Stack is the creator of Injury Management Results (IMR) software and founder of Amaxx Workers’ Comp Training Center. WC Mastery Training teaching injury management best practices such as return to work, communication, claims best practices, medical management, and working with vendors. IMR software simplifies the implementation of these best practices for employers and ties results to a Critical Metrics Dashboard.

Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: http://blog.reduceyourworkerscomp.com/

Injury Management Results (IMR) Software: https://imrsoftware.com/

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