When it comes to getting compensation right, there’s a lot at stake. Compensation can affect employee engagement, retention, and performance—all of which are known to impact profitability.
Your compensation review cycles are an opportunity to analyze compensation and make strategic adjustments to account for performance, internal equity, and cost of market increases. Rather than sticking with the standard 3% increase or trying to work with whatever budget you’re given, partner with your Finance team to get the salary increase budget you need to meet organizational goals.
Begin with strategic adjustments
Strategic adjustments support company values and raise up team members who are falling behind. Build a budget specifically for this purpose.
Update your salary bands
A great first step is to update your salary bands. Most organizations (64%) already review market data at least once a year, but the companies that don’t take this step annually risk falling behind. Wages and salaries have grown 5.7% over the last year and it’s important for your salary bands to reflect that growth if you want to remain competitive.
Take a look at current survey data to see how factors like competition for talent and inflation have impacted cost of market compensation.
Also pay attention to how recent hires are being compensated compared to tenured employees, and sync with your recruitment team around how offers are being received by candidates. Survey data may lag the market, so this real-time feedback can help you build more realistic salary bands.
Once you’ve updated your salary bands, determine the budget needed to bring all team members in-band.
Analyze pay equity
Look at pay equity next. Standardize your compensation data using compa-ratios, and compare averages by demographic group.
Don’t forget about intersectionality, as different parts of a person’s identity can impact their employee experience. For example, Black women are often paid less than Black men and White women. Looking at pay equity from different angles can help identify inconsistencies. To that end, consider how pay equity for each demographic group differs by location, function, and department.
Then drill down and look at compa-ratios individually. Those with lower compa-ratios should be newer, less experienced team members, and those with highest compa-ratios should represent your top performers. Determine the budget you will need to make necessary pay equity adjustments.
Plan for merit allocations
Once you’ve determined your needed budget for strategic adjustments, plan for merit-based raises and promotions.
Many companies utilize a published merit matrix that managers are either required or encouraged to use. Top performers typically receive small or moderate variations in salary increases compared to their peers:
- 65% of companies say top performers see an increase that’s between 1.25x and 1.5x the average
- 16% say top performers see an increase that’s 2x the average
- 2% say top performers see an increase that’s 3x the average
- 5% say top performers earn approximately the same increase as everyone else
When used in conjunction with strategic adjustments, targets may shift. For instance, cost of market adjustments may be used instead of merit-based adjustments for low performers. Or, in the absence of a formal performance rating system, you may rely on stakeholder discretion to allocate merit-based raises. In that case, work with stakeholders to determine an appropriate budget for merit allocations.
Also work with stakeholders to plan for promotions and accompanying raises. Find out who will be promoted, and to which job level and salary band. You may also want to identify team members who are nearing the top of their salary bands so that you may start planning ahead for your next compensation cycle.
Submit your salary increase budget proposal to Finance
Gather all your recommendations, and put together a proposal for your Finance team. You may also want to include a 5-10 percent holdback budget for executive stakeholders to make additional targeted and discretionary adjustments at the end, or to address pay equity concerns.
Bring your proposal to your finance team to discuss a reasonable budget that will accomodate strategic adjustments and merit-based raises. Discuss how you came about each number, and why the various adjustments are important. For instance, you might explain how pay inequities are contributing to low employee engagement and high turnover, and how an investment in this area would benefit your company.
In the event Finance provides a budget that’s lower than you had requested, prioritize how to spend it based on your company values and priorities. Is pay equity or rewarding for performance more important? Are recruiting and retention higher-priority in some positions and departments than in others? Are there other incentives you might offer, such as a one-time bonus, a stock refresher, or extra vacation time? Or, can you make adjustments over the course of several compensation cycles?
Final thoughts on setting your salary increase budget
Despite some economic uncertainty, an August 2022 report found projected annual increases are 4% for 2023—and a quarter of employers plan to give increases in the 5–7% range.
We’re in a historically tight labor market and compensation teams know this is what’s needed to retain talent. You may already be ahead of the curve if you ran a mid-year compensation review or you may be falling behind if you didn’t keep up with wage growth this year. Perform your own analyses to see what your salary increase budget should look like in 2023. By taking a strategic, proactive approach to setting your salary increase budget, you can become a trusted advisor to your Finance and leadership teams.
Want to learn more about setting yourself up for a successful compensation cycle? Download our eBook: How to Execute a Strategic and Efficient Compensation Cycle: Plan