Module 4 – Background


In Module 4, we will be looking at the importance of determining compensation program effectiveness. There are basically two commonly used approaches to evaluate the effectiveness of HRM’s total rewards practices: the audit approach and the analytic approach.

The Audit Approach 

The audit approach focuses on reviewing the outcomes of the human resource compensation function. Key indicators and customer satisfaction measures are typically collected.

Electronic employee databases and information systems have made it much easier to collect, store, and analyze key indicators than in the past, when information was kept in paper files. 

Some examples of key pay-related indicators include: 

· Per capita (average) merit increases

· Ratio of recommendations for reclassification to number of employees

· Percentage of overtime hours to straight time

· Ratio of average salary offers to average salary in community

· Fairness of existing job evaluation system in assigning grades and salaries

· Competitiveness in local labor market

· Relationship between pay and performance

· Employee satisfaction with pay

Some examples of key benefits-related indicators include:

· Average unemployment compensation payment (UCP)

· Average workers’ compensation payment (WCP)

· Benefit cost per payroll dollar

· Percentage of sick leave to total pay

· Promptness in handling claims

· Fairness and consistency in the application of benefit policies

· Communication of benefits to employees

· Assistance provided to line managers in reducing potential for unnecessary claims 

Many firms have gone to surveys of top-level line executives as a means of assessing HRM effectiveness. For example, relating this to total rewards, the top-level line executives can see how the total rewards system and practices are impacting both employees and the overall effectiveness of the firm from a strategic standpoint. They can also help determine how well HR employees’ perceptions of total reward program effectiveness align with the views of their line colleagues.

The Analytic Approach 

In this approach, focus is placed on either: 

a. Determining whether the introduction of a total rewards program or practice (like a new benefit) has the intended effect. Usually evaluators are most interested in determining the degree of change associated with the program or practice. 

b. Estimating the financial costs and benefits resulting from a new compensation practice. In this approach, concern is placed on the dollar value (costs vs. benefits) of the new total rewards program or practice. For example, determining the effectiveness and cost-effectiveness of a wellness program might include:

· Annual direct program costs, per employee per year

· Percentage of cardiovascular disease risks (high blood pressure, overweight, smoking, lack of exercise) reduced or relapse prevented

· Amount spent per 1% of risks reduced or relapse prevented  Once the total reward program or practice has been evaluated, HRM can explore how to improve its effectiveness in contributing to the competitiveness of the organization. There are several different ways HR professionals might attempt to improve the effectiveness of a total rewards program/practice:

· Restructuring: For the total rewards/HRM function to contribute strategically to the firm’s effectiveness, the senior HR person must be part of the top management team. 

· Outsourcing: This entails contracting with an outside vendor to provide a total rewards product or service to the firm, instead of producing the product/service using employees within the firm. 

· Process Redesign/Reengineering: Completely reviewing critical work processes to make them more efficient and able to deliver higher quality total reward services. This may also include implementing new technologies (e.g., HRM information systems). 


Erfurt, J., Foote, A., & Heirich, M. (1992). The cost-effectiveness of worksite wellness programs. Personnel Psychology, (45) 22.

Noe, R., Hollenbeck, J., Gerhart, B., & Wright, P. (2006). Human Resource Management. New York, NY: McGraw-Hill Irwin.

Tsui, A., & Gomez-Mejia. (1988). Human Resource Effectiveness. Washington, DC: The Bureau of National Affairs.

Required Material

Aldana, S. (2018). Wellness ROI vs. VOI: The best employee wellbeing programs use both. Retrieved from

Heathfield, S. (2016). Are you getting the best benefit from your employee benefits? Retrieved from

Helios HR. (n.d.), What makes up a great total employee rewards package? Retrieved from

Hipple, S., & Stewart, J. (1996). Earnings and benefits of contingent and noncontingent workers. Monthly Labor Review, 119(10), 22-30. Retrieved from the Trident Online Library.

Lawrence, T. (2012). Integrating contingent workers. Baseline, (114), 13. Retrieved from the Trident Online Library.

Pedulla, D. S. (2013). The hidden costs of contingency: Employers’ use of contingent workers and standard employees’ outcomes. Social Forces92(2), 691-722. Retrieved from the Trident Online Library.

The Kaiser Family Foundation (2018). Employer Health Benefits 2018 Annual Survey: Section 1: Cost of Health Insurance, pgs. 31-42. Retrieved from

Optional Material

Armstrong, M., Brown, D., & Reilly, P. (2011). Increasing the effectiveness of reward management: An evidence-based approach. Employee Relations, 33(2), 106-120. Retrieved from the Trident Online Library.

OWLPurdue. (2012, May 9). Purdue Owl: APA formatting: The basics [Video file]. Retrieved from

Society for Human Resource Management. (2017). Visit the SHRM website ( ) for some of the latest information on dynamic HRM topics, certification details, and SHRM membership information.