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Annual(ish) Compensation Cycles: Being Strategic Despite Chaos

Jen Dewar
Jun 12, 2019 6:00:00 AM

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 are likely being poached by competitors, and some may negotiate counter-offers to stay. Managers don’t know their team’s salary history at your organization, and some may simply provide standard three percent raises 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 across many organizations. The top earners aren’t necessarily the highest performing, 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, make adjustments for corporate priorities, like compliance needs. 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 bands. 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.

You may also want to update your salary bands, if needed. For instance, if you’ve found that newer employees are consistently negotiating above-band, or if your recruiting team is experiencing a low offer acceptance rate. You may also hear that more employees are leaving due to compensation. All can be signs that you need more competitive salary bands that reflect market rates in order to attract and retain your talent.

It’s a good idea to revisit salary bands once or twice per year, so you at least know where you stand. If you plan to increase them, keep in mind that you don’t have to implement those changes right away. Again, make a plan and communicate it to your team so they know it’s coming. Even if you decide not to update your salary bands, it’s important to know if you’re lagging the market so you can try to make up for it in other ways—such as flex work.

Phase 2: Enable managers to make merit adjustments

After you’ve made strategic adjustments, allow managers to make merit adjustments so you can hang on to 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. In this case, it can be helpful for the manager to understand each employee’s Compa ratio, range penetration, and salary history at your organization. These compensation metrics can help them make more informed decisions around merit adjustments, rather than simply giving employees a standard three percent raise.

Managers may also find that entry-level employees are outperforming their more tenured employees. In this case, it’s important that managers are aware of the job levels and salary ranges for each employee so they can make an appropriate merit adjustment, or even 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 with a Compa Ratio below 1.0, you should make both a strategic and merit adjustment.

Payscale reports that 10 percent of organizations have given an increase of 20 to 30 percent, unrelated to a promotion. 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. Most top performers should already be above a 1.0 Compa ratio, and a smaller merit adjustment for an increase in experience may be appropriate.

In the event you find that an employee’s compensation is above band, you will need to have the hard conversation with them that 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 mid-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 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. When you can, leave room in your 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.

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