Despite the fact that most comp managers are crazy busy, it’s time to add a task to the mix, says Dorf—a thorough compensation program audit. And, yes, in spite of what could be construed as a self-serving suggestion, he wants you to hire someone else to do it. Dorf is managing director of Compensation Resources, Inc. in Upper Saddle River, NJ.,
Compensation audits may alert you to some direct pay problems like discrimination or overtime. But the audit can also alert you to some more indirect—but vitally important—problems like turnover, says Dorf.
For instance, he says, a few years ago a company called us in to examine their compensation plan. They wanted to know why they were experiencing so much turnover. This was a billion-dollar firm, and they said they had lost about $1.5 million to turnover in the last year.
When Dorf reviewed the numbers, he found that the company had actually lost $87 million (!) that year because of turnover—and that was only the hard dollar piece.
The soft dollar piece is harder to calculate, but equally important. It is things like managers who have to spend time recruiting rather than doing their jobs, lower morale, and similar things that are hard to quantify. They were losing an unbelievable number of employees.
That is the kind of thing an audit can pick up, Dorf says.
Incentivizing the Right Things
As part of your audit, review your compensation system to make sure it is incentivizing your company’s important goals. In particular, look at sales incentives.
Sales people tend to work within their comfort zones, Dorf says. They sell the product or service they feel most comfortable with, to the customer they feel most comfortable with and sometimes at a price that may not be what the company wants it to be.
Often, however, the company wants them to be selling something different, something with higher margins, something with a time/life that is ticking away. So adapting your compensation plan to account for that would be smart.
Keeping It Simple
The plan should not be overly complicated. How can the compensation plan motivate someone if nobody knows how it works, and nobody knows how much he or she will be making and why? Dorf asks.
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Don’t Go It Alone
If he has convinced you that you should conduct an audit of your comp plans, he says, you probably think that, in spite of all the work in your inbox, you should tackle the audit yourself.
Don’t, advises Dorf. Yes, he knows it sounds self-serving, but it’s important to bring somebody in from the outside. It not only gives an unbiased perspective, it also allows staff to concentrate on their normal work.
Also an outsider is willing to step on a few toes that an employee might be reluctant to step on, and can ask the hard questions that no one else dares to ask. The outside perspective provides a level of objectivity that is really important, Dorf says.
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If the employer only found $1.5 million in losses, and the consultant found $87 million, that’s a pretty good indication that, yes, it’s a good idea to bring someone in to do the audit!
Although … how does the auditor get compensated? If it’s based on the amount of losses it finds, that would of course provide an incentive to inflate the actual losses.