Annual(ish) Compensation Cycles: Being Strategic Despite Chaos

Compensation can get chaotic pretty quickly. In today’s competitive talent landscape, candidates have more leverage to negotiate higher salaries than your current employees earn. Current employees may be entertaining other opportunities and negotiating counteroffers to stay. Managers may not be aware of their team members’ salary history at your organization and simply provide a flat raise percentage or amount to everyone. Other managers may provide “merit-based” raises to their favorite employees, rather than the true top performers.

In any case, compensation is often distributed inconsistently within an organization. The top earners aren’t necessarily the best performing or most tenured employees, but may simply be more recent hires, better negotiators, or more well-liked. An annual compensation cycle, broken into two phases, may help you implement more fair and consistent compensation practices.

Phase 1: Make strategic adjustments

First, update your salary bands and make adjustments for corporate priorities like retention or pay equity.

The 15 largest economies around the world had a 4.9% average actual salary increase in 2022 and are forecasting an average increase of 4.9% in 2023 as well. Revisiting your salary bands can help your company keep up with wage growth and remain competitive in the talent market. This is particularly important if newer employees are consistently negotiating above-band, if your recruiting team is experiencing a low offer acceptance rate, or if more employees are leaving due to compensation. 

Then suss out the compensation decisions that don’t conform to company values or the law, and fix anything that’s broken. For instance, you may find that a specific gender or ethnicity earns more than other groups, or that some employees fall below your salary ranges. Look into each case to determine where an adjustment is needed.

It’s wise to set aside a budget specifically for this purpose so you can implement changes right away—especially if you’re at risk of non-compliance. But if you don’t already have the budget planned, you may opt instead to make a plan to implement adjustments as you’re able, and communicate that plan to your team. Thoughtful employee communication increases trust, and can buy you some time to make things right.

Phase 2: Enable managers to make merit adjustments

After you’ve made strategic adjustments, allow managers to make merit adjustments so you can retain your top performers. It’s not uncommon for a top performer to be earning less than their peers, simply because a new manager doesn’t realize the employee is underpaid for their contribution. 

It can be helpful for your managers to understand their team members’ pay range penetration and salary history at your organization. This enables them to make more informed decisions around merit adjustments so your budget can be allocated more deliberately. 

Managers may also find that newerl employees are outperforming their more tenured employees. In this case, it can be helpful if managers are aware of the job levels and salary ranges for each employee so they can make an appropriate merit adjustment, or even recommend a promotion.

However, these scenarios can mean that some employees earn significantly higher raises than others—especially those adjusted for compliance and merit. For instance, if you have a top performer from an underrepresented group who’s below band, you should make both a strategic and merit adjustment. Make sure your decision-making process is communicated to employees so it doesn’t come across as unfair to those who are receiving smaller increases, or no increases at all. 

In the event you find that an employee’s compensation is above band, you may need to have a difficult conversation around why they will not be receiving an adjustment in the current compensation cycle. Instead, focus on a development plan to help them reach the next job level and corresponding salary band. Once they reach that goal, you may consider an off-cycle adjustment at that point, or offer the promotion first with the salary increase to follow.

Final thoughts on compensation cycles

Compensation cycles are a great opportunity to keep up with record wage growth and right some of the wrongs your employees may be experiencing in terms of compensation. While inconsistencies do happen, it’s important to take the time to look for them and correct them before they come back to bite you. 

For this reason, it’s becoming more common for organizations to run a mid-year compensation review cycle. While only 6% of HR managers have decided to review compensation at least twice a year, around 20% plan to review off-cycle salary increases as needed. And another quarter of HR managers are considering it. 

When you can, leave room in your compensation review cycle budget for both strategic and merit adjustments, so you have the flexibility to make changes as they need to happen. Otherwise, make a plan, and communicate it to your team to ensure they understand that you’re monitoring and addressing potential issues around compensation. This can do wonders for employee attraction and retention—not to mention mitigating your risk of non-compliance.