By: Amy Dozier on September 4th, 2013

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How to Create a Pay Increase Budget

Total Rewards | Business Management & Strategy | Best Practices | Employee Relations

It’s budget time!  Since labor is usually the highest expense an organization has, it is crucial to take the time to determine your pay budget.  If planned properly, pay increases can be a tool to help engage, motivate, and retain top talent.  Below are a few things to take into consideration when setting your pay budget:

1. Surveys

Use surveys to determine what other companies are planning.  Knowing the market will help you stay competitive.  Tip: Make sure the surveys you are using have other organizations in your industry.

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2. Performance Mix

Generally, we expect to see a bell-shaped curve when analyzing performance rating distributions.  However, in reality, we often see organizations whose performance rating distribution is skewed to the right.  Why this happens and how to fix it is a discussion for another day, but knowing how your organization tends to rate will help you ensure that you do not under budget.

3. Differentiate Pay Budgets

Set different budgets for Merit, Promotions, and Adjustments and communicate each pay increase separately, rather than in one lump sum, to your employees so they know why they are receiving the increases they are getting.

4. Compa-Ratio 

Knowing your organization’s compensation philosophy and how your employees are actually paid compared to the market will help you determine if any adjustments may have to be made.  Often, employees who are paid above the max for their position will receive a lump sum payment in lieu of a merit increase.  On the other hand, employees paid below the market minimum may receive a higher increase to help them get to the market median. 

Tip: Should you ever get audited, put a memo in the employee’s file documenting your plan to bring the employee’s pay back to market.

5. Be Fiscally Responsible

Understand the health of your organization and coordinate with your Finance Department to know what your organization can afford.

Simply looking at the survey data and setting your increased budget is not enough.  Spend the time now to determine the right budget.  If you don’t, you could be spending the next few months handling employee relations issues and recruiting.  But, if done right, pay increases can be motivating to your top performers and may help retain the employees you can’t afford to see go.

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