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How to Execute a Strategic and Efficient Compensation Cycle

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How to Set your Raise Cycle Budget

Jen Dewar
Apr 15, 2021 6:00:00 AM

In many organizations, the raise cycle budget is determined by Finance. In some cases, this can happen without much—or any—input from the HR team. This is a mistake. Compensation is often an organization’s biggest operating expense and there are many benefits to using it strategically. Compensation can affect things like employee engagement, turnover, and internal equity, all of which are known to impact employee performance and company profitability.

When it comes to getting compensation right, there’s a lot at stake. 

Regular raise cycles are an opportunity to analyze compensation and make necessary adjustments to account for performance, internal equity, and cost of living increases. Rather than simply trying to work with the budget you’re given, become a strategic partner to your Finance and leadership teams to ensure you get the raise cycle budget you need.

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.

A great first step is to update your salary bands. Take a look at current survey data to see how competition and cost of living 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.

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. 

An objective, fair way to allocate merit-based raises is to tie them to performance data. A 5-level performance rating system is commonly used, with the top performers receiving the highest increases. For example, average increases in 2019 were:

  • 4.8 percent for the highest performing team members
  • 3.8 percent for the next highest rated
  • 2.9 percent for average performers
  • 1.1 percent for low performers
  • 0.2 percent for lowest rated team members

When used in conjunction with strategic adjustments, these 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 5-level 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 what level. The average increase for a promotion is 9.3 percent of an employee’s base salary, though raises don’t necessarily need to accompany a promotion if you have overlapping salary bands. 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 proposal to Finance to influence the budget

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 everyone.

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 equity or 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 raise cycle budget

While 9 percent of organizations plan to skip their merit increase cycle or freeze salaries, those that are planning a cycle in 2021 have projected an average total budget of 3 percent. But one size does not fit all. By taking a strategic, proactive approach to setting your raise cycle 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

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