Are You Spending Your Company's Compensation Dollars Wisely?

Compensation costs are the largest single expense most organizations have--ranging from 15 to 20 percent in manufacturing to more than 80 percent in the human services industry.

Recognizing the strategic impact of compensation, senior executives want to know if these dollars are being spent effectively. However, few organizations systematically evaluate their pay programs or only do so in the most rudimentary fashion.

Some assessment does occur. Traditionally, the human resources department evaluates the compensation package to compare it with what other companies are paying. The chief financial officer must evaluate the compensation system in terms of affordability to ensure the organization has the cash flow to pay direct and indirect labor costs. The CFO must consider this issue along with other opportunities or demands on revenue such as investments, customer discounts, and stockholder dividends.

Although the CFO and the head of human resources are evaluating the pay programs from two important perspectives, their assessment provides limited insight into the plan's strategic contribution and ability to motivate employees. A more complete and systematic way to evaluate an organization's pay program must be developed to document how well it works.

Template for Review

An organization's pay system is composed of multiple programs, such as base pay, incentives, and benefits, that are directed toward diverse employee populations.

Over many years, employee development experts created evaluation approaches that I have now adapted for evaluating pay programs into a framework that asks four questions.


Reaction Do employees and managers perceive the pay program as fair, just, and consistent with company values? Opinion surveys and interviews are typically used to collect this information.

Understanding Do employees and managers understand the pay program, how it affects them, and what they need to be positively rewarded by the program? While interviews can be used, simple online tests work best.

• Behavior Does the program drive employee behavior consistent with the values of the company and goals of the program? Observe behavior and create work process measures. For example, design pay programs to reward employees who obtain new customers, as measured by increased sales calls and visits.

• Result Does the program accomplish the desired results? If pay is designed to encourage sales people to generate business from new customers, then are there more sales to new customers? Results can be framed around the individual, work group, department, business unit, or organization as a whole.



Few employers effectively evaluate their pay policies.




Multiple perspectives are important because if the pay system is not having the desired results, access to other perspectives will help to determine why it is failing.

Information to evaluate a pay program must be both reliable and valid and should not be anecdotal. Simply keeping one's ear to ground can be misleading; the most vocal employees do not necessarily represent the majority, and they do not often offer actionable information. This is why a rigorous methodology or process for evaluating pay programs must be established and followed.

To obtain valid, reliable, and timely information, a systematic process must be established to collect, analyze, and report information from the multiple perspectives outlined above. This includes specifying pay goals consistent with the business' strategy and aligned with the firm's pay philosophy.

Next, measurable criteria must be determined for each pay program goal. This can include measuring the perception of a program's fairness or the effectiveness of an increased sales goal.

A research design then must be established so the data collected are reliable and conclusions drawn from the data can be considered valid. Care must be taken to ensure that mistakes are not made in data collection and data coding. Corrupt data falsify findings that erode the effort to evaluate the pay programs.

Finally, the findings must be interpreted correctly and reported so information is coherent and can be used to make decisions to improve or abandon pay programs.

Evaluating pay systems requires integrating multiple perspectives with a rigorous evaluation process. Although program evaluation can be fairly straightforward, consider using an outsider to conduct evaluations or at least to provide assistance in designing the process. An outsider can provide expertise in evaluation and may be perceived as less biased or at least able to provide feedback that would be difficult for an insider.

A relatively small investment in evaluation can determine if a program is doing what it was designed to do and can provide meaningful feedback for improvement.

By Dow Scott  

References:Kirkpatrick, Donald L. (1998). Evaluating Training Programs: The Four Levels. 2nd ed. San Francisco: Berrett-Koehler Publishers Inc.
Scott, K.D., Morajda, D., and McMullen, T.D., (2006) Evaluating pay program effectiveness. WorldatWork Journal. 15(2), 50-59.