Guide for Performance Audits and Special Examinations on Compensation (November 2018)

Contents
Introduction
Purpose of this guide
Applicability and audience of this guide
Auditor’s responsibilities
Background and context
Key terms and concepts
Legislative and related requirements
Audit guidance
Why compensation is important
Identifying and assessing risks for audit selection and/or for audit scoping
Recommended audit approach

Introduction

NOTE TO AUDIT TEAMS: The Treasury Board of Canada Secretariat is responsible for compensation across most of the federal public service, except those organizations that have authority for human resource management, including compensation. These organizations include separate agencies and Crown corporations (in particular those that do not depend on appropriations). This guide therefore applies to audits of these types of entities.

Purpose of this guide

The purpose of this guide is to assist audit teams who have identified a risk that the entity under audit does not provide compensation that contributes to attracting, retaining, and rewarding employees and/or does not provide compensation in line with federal or organizational policies and principles. As a result, the audit team is considering and/or planning to carry out audit work in this area.

This guide provides audit teams with

  • an understanding of compensation, including legislative and related requirements;

  • guidance on determining whether compensation is an area of risk that should be examined; and

  • a recommended approach to auditing compensation. While this approach is comprehensive, audit teams may wish to tailor it to their audit context in consultation with the Human Resource Management Internal Specialist.

Applicability and audience of this guide

This guide applies to performance audits and special examinations. It is intended for engagement leaders and their respective audit teams.

Auditor’s responsibilities

Per the Direct Engagement Manual section 3081, audit teams are to consult with internal specialists when dealing with matters requiring specialized knowledge and experience.

Background and context

Key terms and concepts

Compensation includes total compensation and covers cash and non‑cash remuneration provided to an employee for services rendered. It includes, but is not limited to

  • salaries and other cash compensation such as performance awards;

  • pension and insurance benefits;

  • paid time off; and

  • allowances to compensate employees for serving in difficult environments (e.g., penitentiaries, isolated posts, foreign service postings).1

There are many factors that must be considered when making compensation decisions, such as private and public sector labour market trends, economic trends, relations with unions, legislation, organizational and classification structures, and internal relativity.

Legislative and related requirements

The following form the legislative basis for compensation in separate agencies and Crown corporations.

  • Financial Administration Act: The Act establishes the responsibility of the Treasury Board, or deputy heads in the case of separate agencies and Crown corporations, to determine and regulate the pay to which persons employed in the public service are entitled for services rendered.2

  • Treasury Board of Canada Secretariat Policy Framework for the Management of Compensation: The Framework sets out an approach to managing compensation within the federal public administration and four overarching principles that guide compensation decisions by the Treasury Board:

    1. External comparability: Compensation should be competitive with, but not lead, that provided for similar work in relevant labour markets.

    2. Internal relativity: Compensation should reflect the relative value to the employer of the work performed.

    3. Individual or group performance: Compensation should reward performance, where appropriate and practicable, based on individual or group contributions to business results.

    4. Affordability: The cost of compensation must be affordable within the context of the commitments to provide services to Canadians, the fiscal circumstances, and the state of the Canadian economy.

The Framework also specifies the responsibilities of the Treasury Board regarding compensation across the different areas of the federal public administration.3

  • Audit entity’s compensation policy and/or strategy and program.

While the range of Treasury Board responsibilities for compensation vary depending on the nature of the public sector organization, the following apply to all organizations:4

  • The Treasury Board is responsible for all matters relating to human resource management in the federal public administration, including the authority to determine terms and conditions of employment. The Treasury Board is also responsible for the terms and conditions of persons appointed by the Governor in Council whose terms and conditions of employment have not been established by an Act of Parliament.

  • The President of the Treasury Board is the Minister responsible for the Public Service Superannuation Act and has overarching responsibility with respect to the financing and funding of all the federal public sector pension plans. Also, the President of the Treasury Board and/or the Treasury Board are responsible for certain discretionary decision making under the legislation governing the plans.

  • The Treasury Board has the authority to establish or enter into a contract to acquire group insurance or benefit programs for the federal public administration and to set the terms and conditions of those programs, including those relating to premiums, contributions, and benefits.

Other Treasury Board responsibilities for compensation management vary depending on the nature of the public sector organization, as follows:5

  • Core public administration: The Treasury Board is the employer of employees in the core public administration. It has the authority to enter into collective agreements with bargaining agents and to set the terms and conditions of employment for executive and other unrepresented employees.

  • Separate agencies: Separate agencies may exercise their own human resource authority granted by their enabling statute or by Order in Council. This authority may be unconditional or subject to conditions such as prior consultation with or approval by Treasury Board. Separate agencies are employers in their own right. Most separate agencies require the approval of the Governor in Council to enter into collective agreements with the bargaining agents representing their employees. By Cabinet directive, 1967, the Governor in Council requires separate agencies, in advance of bargaining, to obtain from the President of the Treasury Board their collective bargaining mandates, including the objectives to be pursued and the limits to be observed.

  • Royal Canadian Mounted Police: The RCMP is listed in Schedule IV of the Financial Administration Act as a part of the core public administration. The Royal Canadian Mounted Police Act provides the Commissioner of the RCMP with certain powers and authorities normally exercised by Treasury Board. However, Treasury Board is responsible for establishing pay and allowances to be paid to members.

  • Canadian Armed Forces: The Treasury Board is not the employer of non-commissioned members of the Canadian Armed Forces. However, the National Defence Act provides that Treasury Board is responsible for establishing pay and allowances of officers and non-commissioned members.

  • Appropriation-dependent Crown corporations: As part of the process for funding appropriation-dependent Crown corporations, their annual reference levels are increased to cover increases in compensation costs at a rate determined by the Treasury Board.

Audit guidance

Why compensation is important

Compensation is important because it is a central component of effective management, and contributes to attracting, retaining, motivating, and renewing the workforce required to deliver results to Canadians. If compensation to employees is not competitive and/or is perceived as inequitable, this could

  • result in recruitment and retention issues; and
  • affect employee morale and engagement, which could lead to
    • decreased productivity,
    • increased sick leave usage, and
    • employee turnover.

All of these consequences may contribute to inefficient delivery of services to Canadians and impede the organization’s ability to achieve expected results.

While compensation should be competitive and serve to attract, motivate, and retain employees, compensation decisions must also consider affordability and fiscal responsibility. Public sector organizations have a responsibility to taxpayers to ensure that public funds are spent responsibly. If such principles are not respected, public funds may be spent inappropriately and result in higher costs to carry out the organization’s work. Moreover, if compensation decisions are perceived to be inappropriate (e.g., excessive, extravagant), this could affect the credibility and reputation of the organization and the federal public service as a whole.

Therefore, employee compensation (cash and non‑cash remuneration) programs should be reviewed or audited every three to five years to determine their effectiveness, competitiveness, and compliance with applicable legislation.

Identifying and assessing risks for audit selection and/or for audit scoping

To help determine whether compensation is a risk that should be considered for audit, audit teams should ask the following questions:

  • Does the organization have a compensation policy and/or strategy and program in place for employees and executives?

  • If yes, is compensation aligned with the organization’s broader business strategy? (For example, if the business strategy has recently changed, does the compensation program support it or should it be revised?)

  • Does the organization monitor its compensation decisions to ensure that salaries, performance awards, and benefits are made in accordance with

    • the organization’s own compensation policy and/or strategy and program;
    • applicable federal and provincial requirements; and
    • Treasury Board compensation principles?

  • For Governor in Council positions, are the salary, performance awards, and benefits provided to the incumbent consistent with the salary, performance awards, and benefits of the Governor in Council level assigned to the position?

  • Are compensation decisions approved by the Board of Directors (or President for lower-level positions)?

  • Does the organization evaluate its compensation policy and/or strategy and program to ensure that they contribute to attracting and retaining employees and executives, and make adjustments as required?

  • Does the organization conduct compensation surveys to benchmark its compensation program (salaries, performance awards, and benefits) against those of relevant comparator organizations to ensure they remain competitive?

  • Is there evidence that the organization reviews its compensation program to determine whether it:

    • Motivates employees to achieve business objectives?

    • Is flexible and competitive so they attract and retain employees? (Or, is recruitment and retention a problem? Do employee survey results and/or exit interviews indicate problems with compensation?)

    • Is sufficiently distinct between current and new employees?

    • Is appropriate for the role and level of responsibility?

    • Is appropriately tied to individual, team, and organizational performance?

  • Do employee survey results or exit interviews show problems with compensation?

  • What information systems (electronic or paper-based) exist to collect, monitor, and report on compensation data, and what is the quality of the data?

Audit teams should request and review relevant documents, such as

  • compensation policy and/or strategy and program for employees and executives and related documentation (including salary ranges and performance awards by position or level, and benefits program, and any documentation that shows how the compensation strategy was developed);

  • actual salaries, performance awards, and justifications (e.g., performance appraisal documents) paid to employees and executives in the last two fiscal years (executives at a minimum, depending on the organization’s size);

  • information provided to the Executive or Board of Directors on compensation (e.g., salary ranges, total compensation envelope, performance award distribution, and President/CEO and VP compensation);

  • organizational reviews and/or audits of the compensation policy and/or strategy and program;

  • results of compensation surveys, including comparator organizations used for benchmarking and any resulting changes made to the organization’s compensation program;

  • employee surveys and exit interview results;

  • list of information systems that support the compensation program, and associated documentation on data quality assurance;

  • corporate risk profile and risk register;

  • reports to senior management on the organization’s compensation policy and/or strategy and program.

Recommended audit approach

The tables below outline the audit criteria and sources, as well as the audit questions, key interview questions and documents, and audit steps and techniques recommended to carry out the examination work on compensation.

Audit Criteria and Sources

Audit criteria (audit teams may use one or both criteria depending on the nature of audit risks identified):

  • The organization has a compensation program that is in line with those in other public sector organizations.

  • The organization has a compensation program that contributes to attracting and retaining employees in order to achieve corporate objectives.

Sources:

NOTE: The audit entity’s own compensation policy and/or strategy and program and collective agreements should also be referenced as a criteria source in addition to those cited below.

Financial Administration Act, last amended 2016 (http://laws-lois.justice.gc.ca/eng/acts/f-11/)

“Powers of the Treasury Board

(…)

“11.1 (1) In the exercise of its human resources management responsibilities under paragraph 7(1)(e), the Treasury Board may

(c) determine and regulate the pay to which persons employed in the public service are entitled for services rendered, the hours of work and leave of those persons and any related matters;”

“Delegation by Governor in Council

11.2 (1) The Governor in Council may delegate to the minister of the Crown responsible for a separate agency, or to its deputy head, any of the powers or functions of the Governor in Council or the Treasury Board in relation to human resources management in that separate agency, subject to any terms and conditions that the Governor in Council directs.”

Policy Framework for the Management of Compensation, 2007 (https://www.tbs-sct.gc.ca/pol/doc-eng.aspx?id=12084&section=HTML)

Principles

Compensation serves, with other key frameworks, to attract, retain, motivate, and renew the workforce required to deliver results to Canadians.
Audit Question Key Interview Questions and Documentation Audit Steps and Techniques

Q1—Does the organization have a compensation, policy, and/or strategy and program in place?

Key interview questions

  • If yes, is compensation aligned with

    • the organization’s broader business strategy? (For example, if the business strategy has recently changed, does the compensation program support it or should it be revised?)

    • the classification policy and structure?

  • Does the organization’s compensation policy and/or strategy and program specify its approach to managing employee and executive compensation? For example, does it include

    • the total compensation budget?

    • what percentile it pays in relation to the labour market?

    • the salary ranges for each position or level, including executive positions and levels?

    • the performance awards and benefits for employees and executives?

    • how salary increases are determined and when they occur (could include collective agreement considerations if workforce is unionized)?

    • the frequency and approach to compensation reviews (e.g., benchmarking against relevant comparators)?

    • legal requirements (federal and provincial)?

    • roles and responsibilities for compensation management?

    • an approval process for compensation decisions (e.g., Board of Directors, President)?

Key documentation

  • Compensation policy or strategy, program, and related documentation, including

    • documentation that shows how the compensation strategy was developed,

    • salary ranges by position and level,

    • a performance award structure for employees and executives,

    • a benefits program for employees and executives,

    • roles and responsibilities for compensation.

  • Classification policy

  • Delegation of HR authorities

Request and review documentation.

Interview

  • Officials responsible for compensation, performance awards, and benefits; e.g., VP HR, Compensation and Benefits Director / Manager, Compensation and Benefits Advisor

  • Senior / line managers (if applicable)

Assess whether the organization has a compensation policy and/or strategy and program in place and whether they include the elements in the second column.

Document observations and respond to audit question.

Q2—Is the organization’s compensation policy and/or strategy and program in line with other public sector organizations?

Key interview questions

  • What information and data are used to determine salaries, performance awards, and benefits provided to employees and executives (e.g., benchmark data from other organizations, including public sector organizations)?

  • Which organizations, if any, are used as comparators for benchmarking? Are the comparator organizations reasonable? For example, is there a balance between public and private sector organizations? (Note that comparators should not be limited to high-paying private sector organizations, such as banks and other financial institutions.)

  • Does the organization use the principles that guide compensation decisions in the federal public service (internal and external relativity, individual and group performance, affordability) when making its own compensation decisions? If not, how does it make such decisions?

  • Is the organization’s compensation policy or strategy and program in line with other public sector organizations, including departments, separate agencies, and Crown corporations (e.g., comparable salaries, performance awards, and benefits)?

Key documentation

  • Compensation policy or strategy, program, and related documentation, including

    • salary ranges by position and level,

    • performance award structure for employees and executives,

    • benefits program for employees and executives.

  • List of comparator organizations that are used for benchmarking;

  • Other relevant documentation, e.g.

    • senior management committee documentation (agendas, minutes, presentations and reports discussed, records of decision);

    • HR committee meeting documentation;

    • relevant internal audits or evaluations of the organization’s compensation policy and/or strategy and program.

Request and review documentation.

Interview

  • Officials responsible for compensation, performance awards, and benefits; e.g., VP HR, Compensation and Benefits Director/Manager, Compensation and Benefits Advisor

  • Senior / line managers (if applicable)

Analyze the organization’s compensation policy or strategy and program and assess whether it is in line with other public sector organizations. Important Treasury Board of Canada Secretariat benchmarks include:

  • The federal public service pays at the 50th percentile of the labour market (on average).

  • Executives at the EX-01 to EX-03 levels may receive at-risk pay of up to 12 percent of their base salary and a bonus of up to 3 percent.

  • Executives at the EX-04 and EX-05 levels may receive at-risk pay of up to 20 percent of their base salary and a bonus of up to 6 percent.

  • Common benefits (perks) for executives include four weeks’ paid leave, parking, and professional memberships. A corporate vehicle may be provided to senior executives.

Document observations and respond to audit question.

Q3—Does the organization monitor its compensation decisions to ensure that salaries, performance awards, and benefits are made in accordance with

  • the organization’s own compensation policy and/or strategy and program,

  • applicable federal and provincial requirements, and

  • Treasury Board compensation principles?

Key interview questions

  • Does the organization monitor its compensation decisions to ensure that:

    • the organization’s compensation policies are followed, and that supervisors and managers properly manage and reward performance?

    • applicable federal and provincial requirements are respected; e.g., Governor in Council salary ranges and performance awards (federal) and minimum wage requirements (provincial)?

    • Treasury Board compensation principles are respected?

  • Does the Board of Directors (or the President for lower-level positions) approve compensation decisions? If so, what information is provided to them in this respect?

  • What information systems (electronic or paper-based) exist to collect, monitor, and report on compensation data?

  • Does the organization have data quality systems and practices in place to ensure the integrity of HR data, including compensation data?

Key documentation

  • Federal and provincial requirements that apply to the organization.

  • Compensation policy or strategy, program, and related documentation, including

    • salary ranges by position and level,

    • a performance award structure for employees and executives,

    • the benefits program for employees and executives.

  • Actual salaries and performance awards paid to employees and executives in the last two fiscal years (executives at a minimum, depending on the organization’s size).

  • Information provided to the Board of Directors on compensation (e.g., salary ranges, total compensation envelope, performance awards distribution, President/CEO and VP compensation).

  • HR information system documentation (e.g., user manuals, guides, data quality reports) where compensation data is collected and maintained.

  • Other relevant documentation, e.g.

    • senior management committee documentation (agendas, minutes, presentations and reports discussed, records of decision),

    • HR committee meeting documentation,

    • relevant internal audits or evaluations of the organization’s compensation policy and/or strategy and program.

Request and review documentation.

Interview

  • Officials responsible for compensation, performance awards, and benefits; e.g., VP HR, Compensation and Benefits Director / Manager, Compensation and Benefits Advisor

  • Senior / line managers (if applicable)

Perform a walkthrough of key HR information systems (electronic or paper-based) that collect and maintain compensation data to determine what information exists, its quality, and how it is used and reported on, if this was not already done in the planning phase.

Analyze a sample of actual salaries, performance awards, and benefits provided to employees and determine whether they are consistent with applicable federal and provincial requirements and the organization’s own compensation policy or strategy and program.

Assess whether the organization monitors its compensation decisions to ensure that they are made in accordance with applicable federal and provincial requirements and the organization’s own compensation policy and/or strategy and program.

Document observations and respond to audit question.

Q4—Does the organization evaluate its compensation policy and/or strategy and program to determine whether it is achieving intended results, and make adjustments as required?

Key interview questions

  • How often does the organization review its compensation policy and/or strategy and program?

  • What does the review include? For example, does it assess whether the organization’s compensation program:

    • Motivates employees to achieve business objectives?

    • Is flexible and competitive to attract and retain employees? (Or, is recruitment and retention a problem? Do employee survey results and/or exit interviews indicate issues with compensation?)

    • Is sufficiently distinct between current and new employees?

    • Is appropriate for the role and level of responsibility?

    • Is appropriately tied to individual, team, and organizational performance?

  • Does the organization conduct compensation surveys to benchmark its compensation program (salaries, performance awards, and benefits) against those of relevant comparator organizations to ensure they remain competitive?

  • Are the results of this review reported to senior management and the Board of Directors?

  • Does the organization adjust its compensation policy and/or strategy and program as required? When adjustments are made, are justifications provided?

Key documentation

  • Most recent review of the organization’s compensation policy and/or strategy and program.

  • Results of compensation surveys, including comparator organizations used for benchmarking.

  • Reports to senior management on the organization’s compensation policy and/or strategy and program, including any changes proposed.

  • Other relevant documentation, e.g.

    • senior management committee documentation (agendas, minutes, presentations and reports discussed, records of decision)

    • HR committee meeting documentation

    • relevant internal audits or evaluations of the organization’s compensation policy and/or strategy and program

Request and review documentation.

Interview

  • Officials responsible for compensation, performance awards, and benefits; e.g., VP HR, Compensation and Benefits Director / Manager, Compensation and Benefits Advisor

  • Senior / line managers (if applicable)

Assess whether the organization evaluates its compensation policy and/or strategy and program to determine whether it is achieving intended results (e.g., attracting and retaining employees) and makes adjustments as required.

Document observations and respond to audit question.

1 Treasury Board of Canada Secretariat Policy Framework for the Management of Compensation: https://www.tbs-sct.gc.ca/pol/doc-eng.aspx?id=12084&section=HTML

2 Financial Administration Act: http://laws-lois.justice.gc.ca/eng/acts/f-11/

3 Treasury Board of Canada Secretariat Policy Framework for the Management of Compensation: https://www.tbs-sct.gc.ca/pol/doc-eng.aspx?id=12084&section=HTML

4 Treasury Board of Canada Secretariat Policy Framework for the Management of Compensation: https://www.tbs-sct.gc.ca/pol/doc-eng.aspx?id=12084&section=HTML

5 Treasury Board of Canada Secretariat Policy Framework for the Management of Compensation: https://www.tbs-sct.gc.ca/pol/doc-eng.aspx?id=12084&section=HTML