Compensation Budgeting How-To: Decide What to Reward and Streamline Your Processes

This is an excerpt from our budgeting how-to whitepaper. Download the full version here.

When it comes time to calculate your increase amounts, there are a couple steps you’ll want to take well in advance. First, think about what you want to reward with your increase dollars. Also, take some time to streamline your increase process so that it can run swiftly and efficiently, amidst the other initiatives you’re working on. Once you’ve accomplished those two steps, you’re ready to calculate raises and summarize them in a budget request (next post!).

Know What You Want to Reward

Deciding what you want to reward is the very first step in calculating your increases, and you have options:

  • Market trends: If you decide to base your increases primarily on the value of your positions in the markets, you will be allocating your increases by position in range. So, those who are lower in range get a higher increase than those employees falling higher in range. Over the long term, employees know that they are paid fairly to market, but aren’t given a major incentive to perform better.
  • Performance: If you decide to base your increases on performance, increases are allocated based on both performance and position in range. This means that those with higher performance get a higher increase than those with average performance. Ideally, those with low performance would not get an increase so that you’re really driving home your compensation philosophy of paying for performance. Over the long term, employees will know that they are paid fairly based on their outputs, efforts and contributions.
  • Proficiency: If you decide to base your increases on proficiency, you are allocating your increases based on how well your employees know various aspects of the job. Over the long term, employees learn quickly and rapidly master the basics of the roles, but often there isn’t much incentive to go above and beyond.
  • Tenure: Finally, if you base your increases on tenure, you are giving a flat increase that reflects how long your employees have been in their roles and/or with the organization. In the long term, employees will know that they just have to stick around long enough to keep getting increases. There is a very low incentive to perform well with tenure-based increases.

A quick note about cost of living adjustments (COLA): They typically are not recommended, as they encourage mediocrity and aren’t a strategic way of spending limited budget dollars. One of our clients talks about what they call a “mirror breath test.” They have joked that at increase time they could hold a mirror up in front of people and if it fogs, they’d give an increase. The idea is that just breathing should not be grounds for an increase. It’s essentially not a wise investment of compensation.

The other way that cost of living is often brought up is to differentiate pay in various geographic areas. Again, there’s danger in stopping at an evaluation of cost of living alone — it doesn’t take into account demand for labor in various areas. An example is looking at the differences in the cost of living in Minneapolis and New York. Costs of living are much higher in New York. That said, when examining the cost of labor for a cook in either area, we’d find that the demand for cooks is much higher in Minneapolis because the supply of cooks is so low. Therefore the cost of labor for cooks is actually higher in Minneapolis, and a restaurant operating there may actually end up paying more for a cook than a similar restaurant in New York.

Ultimately it’s up to you and your organization to determine how you want to reward your employee population. You may not decide to reward your full workforce in the same way. To move on to the next steps in calculating your increases, you’ll need to make some decisions about how you intend to reward employees. Generally, in a market where budgets are limited, it’s most effective to pay for performance.

Streamline Your Increase Process

Now that you’ve determined how to reward your employees, the next thing to consider is how to streamline your increase process — it will depend on your organizational values around transparency and inclusion. Also, knowing the basis for your increases, performance, proficiency, market, etc. will impact the timeline for your process. And finally, you need to create that timeline.

In thinking about your organizational values for transparency and inclusion, some questions to ask are:

  • Who needs to decide on the increases?
  • Who needs to be included in the increase process? Some organizations will include their managers, while others won’t; either way will have an impact on the timeline for your increase process
  • Who needs to be informed about the increase process?
  • How quickly are you able to turn around information at each of the stages of your process?
  • What’s the commitment from the top?
  • One last thing to consider, in terms of developing a timeline, is whether or not you have peak periods when your managers or your executives will be busy, or if there are times of high travel. Having your key decision makers otherwise occupied can slow down your process for approving increases

Based on market, performance or a combination of the two, you’ll next need time to do a market study and to plan your performance cycle to end before your pay cycle starts.

One other thing to think about is whether you intend to do focal or anniversary date increases. Focal increases are when you implement all of the increases for your full population at the same time. Anniversary date increases base the timing of your increases on either the hire or promotion date of your employees. The advantage to anniversary date increases is primarily that you’re spreading out the impact or cost of increases throughout your full fiscal year. The advantage to doing focal increases is that it’s easy to budget actual increase amounts for your full population at once. It’s also easier to align your increases to your organizational goals and your business objectives.

So your process for your increases could look something like the following:

  • July through October, complete a market study so you know the value of your positions. At the same time, conduct your performance evaluation process
  • Toward the end of October, create spreadsheets with projected increases for your employees (or, eliminate the spreadsheet headache with increase management software)
  • At the beginning of November, train your managers on the compensation process and their role in it. Following that you would deliver the projected increase info for their input and recommendations regarding increases for the employees they supervise. Alternatively, you could tie in the compensation training with your performance training in July
  • At the end of November, have some time for edits by your managers and HR
  • At the beginning of December, finalize your increases and obtain final approval for your compensation plan
  • At the end of December, communicate the increases to employees and make payroll adjustments
  • First January payroll, the new pay goes live

Your process could be faster if you have less manager participation or if you give tighter timelines. Definitely keep things like travel and peak work periods in mind as you develop your timeline. Also, there are ways to further streamline by calculating the pay inequities at the organizational job and individual level while your managers are reviewing the increase recommendations.

Want all the steps and details for the full budgeting process? Grab our budgeting whitepaper today!

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