Compensation Budgeting How-To: Calculate Raises

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There are a few different methods to use for calculating raises, depending on what you decide to base your increases on. We’ll look specifically at two methods: market-based increases and performance– or proficiency-based increases.

Market-Based Increases

In market-based increases, you have decided to tier increases by position in range. Start with the budgeted increase percentage overall for your organization, and allocate increases to employees based on how far they have progressed through their range. This would be done based on range penetration for your employees.

It can be done manually in Excel, although there are better, more modern choices available to you that can help you calculate increases automatically. If using Excel, next you would create an increase recommendation spreadsheet. On that spreadsheet you should include all the information managers would need to review in order to make effective decisions about pay.

The following formulas are used to calculate some of the key fields:

  • Compa-Ratio = Current Annual Base / Range Mid
  • Range Penetration = (Current Annual Base – Range Min) / (Range Max – Range Min)
  • Annualized Increase = Increase % * Current Annual Base
  • New Annual Base = Annualized Increase + Current Annual Base
  • New Compa-Ratio = New Annual Base / Range Mid
  • New Range Penetration = (New Annual Base – Range Min) / (Range Max – Range Min)

Once you have the full organization-wide spreadsheet set up, divide it out by division or manager — whatever is the right level of input. Meet with your managers directly to walk through the spreadsheet. Explain to them what’s on the sheet, and any parameters or guidelines if they’re able to make edits to the recommended increases.

Some examples of guidelines might be to tell your managers that they have discretion to edit increases up to a certain percentage, a certain overall budget increase dollar amount may not be exceeded or a certain overall percentage increase may be allowed. Their process is to adjust the highlighted column up or down, giving their input on increases for the employees they supervise. Any discretion exhibited by managers should be clearly documented, so that the rationale for the change is clearly understood.

Performance- or Proficiency-Based Increases

If you decide instead to base your increases on either proficiency or performance, you can use a matrix to calculate your increases. You would then be tiering your increases by position in range and performance or proficiency, whichever you’re aiming to reward. Here again you would start with the overall organizational budgeted increase percentage. Then allocate increases to employees based on both range penetration and performance.

Higher increases would be given to those who exceed expectations and are below minimum or in the bottom third of the range. Lower increases are calculated for those who are either meeting expectations or not, and those who were higher in their ranges.

Again, an easier way to do this is with an automated Compensation Management System. It can also be done manually in Excel if needed. From here you would follow a similar path as the market-based increases: Create a spreadsheet, separate it out by division or manager, train your managers and give clear guidelines and allow for a round of adjustments if you’re allowing them any discretion.

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