Ire367 chapter 13: activating and maintaining an effective compensation system. Compensation budget is simply a forecast of what the firm expects to spend on compensation in the coming year. Can also serve as a way to control compensation costs (e. g. , by requiring departments to secure authorization to exceed their budgeted allocations) and as a benchmark against which to evaluate whether the compensation system is behaving as expected. Top-down approach: management sets a limit on total amount of compensation available for the coming year and then divides available funds among departments and units, which then divide them in turn among their employees. The approach advocated in this book is top-down compensation strategy is being formulated, to ensure that it dovetails with other key strategic aspects of the organization, but button-up for compensation budgeting. Top-down approach to budgeting undermines whole notion of strategic pay.