The compensation audit

A checklist for conducting a pay review to ensure a return on dollars paid.

Does your organization have a focus on productivity improvement? A need to hire employees with “critical skills?” Want to create a high-performance culture? Covet an “Employer of Choice” reputation?

A review of your organization’s pay programs may help your company achieve these, as well as a broad range of other organizational objectives.

The purpose of a pay review is to assess the effectiveness of the organization’s various pay programs in supporting the company’s mission, objectives and values.

What to consider
The following questions can be used to provide the context for a compensation review:

•Are there adequate returns on compensation investments?

•Do pay programs drive desired employee behaviours?

•Do all employees — especially top performers — believe they are being compensated fairly for the work they do?

•Do pay programs and practices compare favourably to those of competitors?

•Are competitive levels of compensation provided for each of your workforce segments?

•Do pay programs support the organization in attracting, retaining and motivating the types of employees the organization needs to succeed?

•Does pay for high performers and key talent truly reflect the value created?

•Are reward practices aligned with key business drivers? For example, if there is a need to increase sales volume, does the compensation plan encourage this?

•Do pay programs link rewards to individual and company performance?

•Do pay programs and practices have a direct and positive impact on the bottom line?

•Are pay programs generating value for shareholders and key stakeholders?

A pay review can help answer these and other relevant questions.

A six-step approach
A proven approach to conducting such a review is to follow a systematic process such as the six-step program outlined below.

This process advocates a holistic approach, starting with taking a look at the big picture by examining the business and workforce contexts, then reviewing the link between the company’s compensation philosophy and its “employment deal,” and, finally, by examining the specific pay programs.

1. Business context: Understanding the business context helps to set the foundation for the goals and objectives of an organization’s pay programs, and therefore will assist in identifying areas of potential misalignment.

The type of business performance analysis needed will vary based on an organization’s industry, current performance and strategic direction. However, generally it may include:

•major business issues;

•industry financial performance;

•the company’s financial performance versus a peer group;

•customer satisfaction;

•retention measures; and

•quality measures.

2. Workforce context: The workforce context encompasses two views — external and internal. The external context considers the talent needed to execute the business strategy and the availability of talent in the major employment markets where the organization competes. A review might include a look at:

•unemployment rates;

•projected job growth by industry, discipline, location; and

•preferences of desired workforce population.

The internal context considers the demographics of the existing workforce, the organization’s staffing strategy and the type of talent the firm may be losing. It may also be valuable to conduct an overall skills assessment of the organization’s workforce.

3. Value: Determining whether pay programs are delivering value involves identifying differences in the types of employees hired and determining which pay and other reward programs will maximize attraction, retention and engagement. Sample analysis might include:

•review of compensation philosophy to ensure alignment with business and workforce contexts;

•assessment of consistency with elements of the “employment deal”;

•employee preference/perceived value;

•employee engagement/commitment; and

•measuring a company’s return on compensation expense.

4. Competitiveness: A comparison of actual pay practices (base pay, incentive pay, stock options, bonuses, recognition programs, and so on.) to the market will enable an organization to determine how its pay practices compare to its competitors for employee talent, as well as whether practices are in alignment with the compensation philosophy. A typical competitive market analysis would include:

•base pay structure/actual pay levels;

•total cash compensation (target and actual); and

•total direct compensation (target and actual).

You may also wish to review practices regarding:

•hiring and retention bonuses;

•“hot skills” premiums; and

•perquisites.

5. Performance: Evaluating how pay programs are linked to individual and company performance involves analyzing the specific needs and drivers of business financial and operational performance and how they link to pay, as well as reviewing the alignment between existing pay program design and payouts relative to employee influence and contribution. Sample analysis may include:

•line of sight to desired performance and results;

•selection and calibration of performance measures;

•correlation between actual performance and reward payments;

•review of performance management system;

•review of pay communication programs; and

•comparison to best practices.

6. Develop a pay review report: After completing the various pay review analyses, a report summarizing the study findings and an action plan for addressing any required changes should be prepared. The action plan should identify objectives, work steps to be completed, roles and responsibilities, deliverables, costs and time frames.

When conducted on a regular basis and followed through with required pay program changes, a pay review can play a key role in ensuring that the organization’s pay programs are competitive, support the business strategy and facilitate the attraction and retention of key talent at all employee levels.

Ingrid Huss is a performance and rewards consultant in Towers Perrin’s Toronto office. She can be reached at (416) 960-2719.

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