4 Tips to Prepare for Salary Planning

Posted by Chris Kelley on Jun 1, 2017 4:45:00 PM

We’re rapidly approaching the start of the 2018 planning cycle for most companies. Compensation professionals will soon be connecting with their finance department colleagues to provide salary budget recommendations for the upcoming year. And since budgets get squeezed more than a tube of toothpaste, you’re going to need a solid business case to justify even the most modest of pay increases.

We’ve put together four tips that should help you prepare for a more successful salary planning budget cycle.

1. Don’t Just Look at Overall Salary Budget Growth

It’s easy to get a hold of an average salary increase percentage estimate, but that simplistic measure of central tendency is clouded with all sorts of variations. What you really need is more insight and context to make informed decisions. Our Salary Increase Survey provides you the overall statistics, but it also slices the data by:

  • Industry
  • Geography
  • Increase type

You can also see how the data has trended over time and compare prior years’ budgets to actual. Nine out of the last ten years, companies reported actual salary increase growth that was less than what they previously projected.  For the 2016 plan year, the average salary budget increase for salaried exempt employees was 3.0%, but actual awarded was 2.8%, or -6.7% lower.

Our tip regarding overall salary budget growth is to make sure you have a comprehensive data source for building your plan.  Participate in the US Salary Increase Survey now to ensure you receive the full report with the insights you need.  Best of all, the survey is free to participants.

2. Make Sure Performance Management Supports Performance Differentiation

Salary budget growth over the past decade has languished at just under 2.9% per year, which means pay increases are a scarce commodity. As a result, companies continue to stress the importance of differentiating performance and distributing merit awards so that the greatest portion goes to the highest rated employees. Rewarding top performers with top dollar has been consistently noted, but the struggle to ‘get it right’ still exists.  64% of companies in last year’s Salary Increase Survey indicated that they plan to take more action to differentiate on merit pay.

Our tip for better salary planning for next year is to work now on ensuring your performance management processes deliver the best results for performance differentiation. The best place to start is ensuring your line managers have the tools, training and skills to differentiate performance.

3. Make Sure Variable Pay is Effective

One key reason variable pay plans have been on the rise is that we have seen the paradigm shift away from age-old practice of awarding base pay increase as the only way to reward performance. As we have shown in earlier posts, the percentage of salary budget companies report spending on variable pay has grown by 70.7% between 1996 and 2016. And for good reason.  By shifting more pay to variable for larger portions of the employee population, companies are able to keep fixed costs in check while still rewarding performance based on business results.  The trick is to ensure you have designed your variable pay plans effectively.

The tip for improving your salary planning cycle is to rely less on fixed pay increases and push for more effective pay plan design.

4. Make Sure Special Adjustments Increase Processes are Rigorous

Companies use a variety of special adjustments throughout the year besides the typical merit increase cycle.  Traditionally, companies may have budgeted specifically to fund promotions, but we’ve seen the prevalence of the practice of awarding promotional increases drop to 6% of organizations.  Much more commonplace now is that we see approximately 70% - 90% of companies awarding some form of market adjustments and/or equity adjustments.

What’s unclear is whether organizations have sound management and control practices in place to ensure special adjustments are being awarded appropriately.  Market adjustments may indeed be necessary to ensure competitiveness, but the adjustment dollars are still part of the scarce salary growth budget. Organizations will frequently have tight merit administration guidelines, calibration exercises and multiple layers of approvals to administer their merit increases, but then scant oversight of off-cycle special adjustments.

The tip for special adjustments is to validate you have the right controls in place to manage your overall payroll spend.

Now is the time to sharpen your focus on all four of these tips in order to get the best results with your upcoming salary budget planning cycle.  You’ll be working with your finance department counterparts soon to build the 2018 budget.  This year, bring to the table sound data on what’s needed to be competitive as well as your plans for how you are improving the utilization of the compensation spend.

Contact us to learn more about how the US Salary Increase Survey provides insight on all four tips.

 

U.S. Salary Increase Survey

 

Topics: salary increase budget, salary planning

Chris Kelley

Posted by Chris Kelley

Chris is a Director of Survey Product Management and is actively involved in the design and administration of a portfolio of salary surveys for Aon Hewitt. Chris previously spent over 20 years working in compensation / HR and he is an adjunct faculty member for WorldatWork where he has taught Market Pricing for over 10 years.