Evaluating Impact of Compensation Plans

The current economic climate is an opportune time for employers to determine if compensation practices are properly aligned with market practices and the organization’s business strategy. A recent thought paper issued by Pearl Meyer & Partners outlines a six-step process for performing an effective employee compensation plan audit.

1. Does Compensation Support Your Organization’s Current Business Strategy?

A detailed assessment of an organization’s compensation philosophy should be conducted by involving input from leadership to determine potential significant changes in strategy, such as entering a new market, major changes in organizational structure, or plans for aggressive acquisitions. If an organization expects significant changes in strategy, the philosophy should be re-examined.

2. What Do Participants Think of the Compensation Plan?

Group or individual manager meetings provide constructive input on compensation programs, and lead to more engaged managers and more effective communication about pay. Additionally, regularly conducted employee opinion surveys are beneficial to assess any trends with respect to employees’ perceptions on compensation.

3. How Does Compensation Link to the Market?

The changing economic environment increases the importance of assessing whether compensation practices are comparable to those in the marketplace. Significant areas to assess include:

• Salary increase budgets and movements
• Annual bonuses and incentives
• Equity

• Competitive pay strategies

4. Is Your Compensation Infrastructure Effective?

The compensation infrastructure changes over time, resulting in the need for adjustments or significant modifications. An assessment of program objectives and practices should include the review of:

• Job titles
• Job descriptions
• Job/career levels
• Pay ranges
• Job evaluation
• Short-term incentives

• Long-term incentives

5. How Do Your Pay Delivery Practices Stack Up?

An organization’s approach to pay delivery should reflect its culture, values, and strategy in order to arrive at an appropriate balance among various pay delivery instruments and desired messages. Issues to examine in pay delivery include:

• The gap between top and bottom performers
• If pay is sufficiently differentiated between pay levels

• The type of performance emphasized

6. How is Your Plan Communicated?

Plan materials should be reviewed to verify that they are consistent with current organization policies and market practices. Additionally, reviews of employee opinion surveys can be beneficial to assess employee’s understanding of compensation policies. Due to constant changes in pay programs, various means of communication should be established to communicate improvements and changes in policies.

An outline of recommendations and alternatives is essential to update compensation programs after a thorough compensation audit is completed. With an audit conducted every three to five years, an organization will keep compensation programs relevant and effective in a changing economy.

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