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October 07, 2009
Compensation Plans: Tips for Auditing Yours

The thought of conducting a self-audit of your compensation plans may be intimidating, and it’s true that you may want to seek expertise to help you the first time through. But once the tracks are laid, you can follow them every year to learn whether your plans are doing what you want them to--or whether they are not.

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Stephanie Thomas, Ph.D., a principal with global expert services firm LEGC, LLC (, says that a self-audit of your compensation plans can help foster fairness and equity in your employees’ pay.

The first step is a close review of your compensation structure, Thomas explains. You should easily be able to see how and why people are paid. “If you have a compensation structure that is transparent and consistent, it should be relatively easy to identify those factors that determine how people are paid.”

One of the key components of compensation self-audit is organization of the data. You may find that the data you typically gather on employees is not sufficient for an audit. Thomas says that categorizing people properly is critical. “People who are similarly situated, meaning they have the same kinds of job responsibilities or job functions, should be grouped together.”

Once you have properly grouped your employees, your audit will likely uncover some that, on the surface, should be paid similarly but are not. Thomas says further analysis is a critical component of the compensation self-audit, often revealing distinctions in abilities, experience, or other, less tangible differences. She calls these “edge factors.”

“If you can’t identify the reasons somebody is paid what they’re paid, then your policy and your structure are probably not transparent and probably not consistent,” she emphasizes, and “you need to remedy that right away. You might want to do an audit, and then follow it up in 3 months or 6 months to see if the changes you made really did what you wanted them to.”

Thomas recommends getting the legal department or outside legal counsel involved in your compensation plan audit before you even start the process. “You need to get the legal perspective on things, because there are confidentiality issues and attorney/client privilege issues. Talking to the legal department will help you cover your bases and make sure you’re doing things correctly.”

You may be thinking about the expense involved, and Thomas admits that the first time through can be time-consuming--and expensive, but it’s a lot like an investment in a good set of tools.

“A lot of the cost is really front end,” she says. “Collecting the data, figuring out what data you should be collecting, structuring the model, really digging in to understand how and why people are paid. But as long as you don’t have any major changes to your compensation system, you can use all that knowledge in subsequent years. It becomes much easier to do.”

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