How to determine your salary increase budget

It may only be July, yet for many Comp & Ben teams, it’s also the month to start the annual salary planning process. Next year’s salary increases need to be budgeted, validated during a number of reviews before they can be finalised and signed off at the end of the year. What do you need to include to determine your next budget?

Fundamental considerations

Company performance and the ability to pay. If you had a good year but are still recovering, a one-time bonus payment may be an alternative to an increase. It won’t have any long-term implications like a regular increase does and won’t impact the end-of-service benefits, pension contributions, if any, or the annual bonus.

It may, however, send a mixed message to employees and requires appropriate communication in advance to them. Outline the reasons for your decision, be transparent with your employees and show, if possible, any positive outcomes (e.g. redundancies can be avoided).

Location and industry-specific practices. While it’s beneficial to know the salary increase projections for your location of operations, you also want to benchmark against other companies within your industry. Often, salary increase forecast surveys differentiate between general industry and specific industries like pharma & health sciences, high tech, manufacturing or retail. By participating in these third-party surveys, you’ll obtain the information broken down by job, level, different percentiles and industry without revealing the actual organisation. Industry-specific forums may also collect the input received from its members and publish the data in anonymous aggregates.

Staff turnover. Many third-party salary survey vendors also collect turnover information. This external information can form the basis for your own benchmarking. Is your involuntary attrition (i.e. where an employee handed in their resignation) higher than common for your sector? Do you notice a trend of resignations within a certain area? This could be by specific jobs, skills, locations or even manager. For the first three, evaluate whether your total rewards package is competitive compared to the job market. If it isn’t, you’d want to review your business case for any market adjustments and also consider non-financial rewards.

Increases

Merit. This is probably still one of the most common components for a salary increase budget. Many organisations link a salary increase with the individual’s performance. In line with Merriam Webster Dictionary’s definition of merit (“character or conduct deserving reward”), only employees with the desired achievements and behaviours will be rewarded with a merit increase. Low performing employees are thus excluded from merit increases.

The Comp & Ben team should understand the anticipated distribution curve for the performance ratings and model possible merit increases percentages for each performance rating to avoid over- and under-spending. Should you only have a small budget available, this activity will also help to answer this question: Is the projected merit increase meaningful for all employees? Setting a stronger message, you can ask yourself: Would we be better off giving a merit increase only to our top performers?

Legal requirements. Some countries set a mandatory increase and/or increase the minimum wage. Organisations for which this applies need to ensure that the statutory adjustments have been implemented on time.

Besides raising the salaries to the new minimum wage and providing the required salary increase, regardless of the employee’s performance, some companies still provide an additional increase. These discretionary increases are often linked to the employee’s performance and would be a merit increase.

Comp & Ben, HR and Finance will need to work closely together during the budgeting process and make avail of the required funds or face penalties for any late implementation.

Inflation/cost of living increases. Often referred to as COLA (cost of living adjustments), this component is aiming to cover the inflationary increases which an employee experiences. This kind of increase is provided to all employees regardless of their performance.

Most governments and central banks provide inflation data and trends on their websites. For organisations also using salary budget predictions obtained from third-party salary surveys, a careful review needs to take place. Does the survey already include inflation in its forecast? In most surveys, inflation will have been factored into the published figures. The fine print clarifies any questions for the Comp & Ben team and double counting inflation can be avoided.

This year, inflationary increases will be an interesting question for Comp & Ben professionals and their businesses in the GCC. With the implementation of VAT in 2018, how will you consider the impact on your employees’ cost of living? Will you factor this into your budget? Big ticket items like rent and school fees are to be excluded. Yet, it’s not 100% clear how food or other items will be affected. What approach will your company take?

Special Pools

Market adjustments. Organisations using market data as the basis for your salary structures should update the salary structure with the latest survey results prior to the salary planning process. Applying the most recent information will show if any of your employees are falling below the market and are potentially paid below the minimum pay for their grade or level.

Depending on your company’s policy, you’ll need to bring these employees to the minimum salary of their grade or level, regardless of their performance. This action is considered a market adjustment.

Market adjustments require a separate budget. Once the new salary structure has been created by Comp & Ben, these individuals can be identified. The difference between the employee’s current salary and the new minimum salary for the job can be calculated and set aside as a special pool.

Comp & Ben and HR can pre-populate this information into the back-end of their automated salary planning tool and the manager would only provide their input for the merit increase. Any legal requirements and inflationary increases should be centrally handled by the Comp & Ben and HR teams. For planning processes with Excel, the manager can complete their planning sheet. Upon completion, the HR or Comp & Ben team will enter the amount for the market adjustment.

Promotions. They are a special pools funds and also need to be tracked separately. Prior to the start of the salary planning process, HR should work with the business and determine which promotions are anticipated. To save time during a generally tight salary planning round, HR can review the suitability of these employees and verify if the candidate meets the minimum requirements or expectations for the next level as per the organisation’s guidelines.

Together with Comp & Ben, the financial impact can be calculated and an appropriate promotions budget can be determined. Keeping in mind the organisation’s ability to pay, any legal requirements and the employee’s salary compared to the market pay, the result may be a smaller promotions budget than desired. If the proposed promotion increases do not meet available funds or the legal requirements, consider postponing some or even all of the promotions. Managers need to be informed about this decision by top management with support from HR or Comp & Ben.

A situation not unknown to this region is the promise of a promotion. Special messages need to be crafted and given to any employee due to be promoted. Depending on the legal framework, such promotions may need to be implemented, potentially without an adjustment to the employee’s remuneration.

New developments

Remove the link between merit and performance? The trend of removing performance ratings continues has led some companies to alter its pay-for-performance strategy. Is it time to give every employee a flat increase and leave managers with the option to offer an additional increase?

The amount of time put into the annual salary planning process by the Comp & Ben team, HR and the business compared to the return in engagement and productivity could make a case for a peanut-butter approach.

Enable the manager to make independent decisions. More companies are giving their managers the responsibility to determine the merit increases. HR and Comp & Ben are generally taking a step back and are reviewing for outliers only. The manager will no longer be able to hide behind HR and needs to explain their decision to the employee directly, if asked by the employee.

In this region but also in other parts of the world, managers are reluctant to clarify their decision-making process to an employee. This is where HR needs to come in, train and empower the manager to make a fair observation of their employees’ performance and distribution of their budgets.

Note, their budgets. If HR or Comp & Ben stepped in to re-distribute the increases, where would be the empowerment of the manager be?

Avoid the entitlement attitude. How many times have you see the entitlement attitude? Employees demanding or exploiting an offering by the company. In this region, sick leave is seen as an extension of annual leave by some employees. Medical insurance is excessively used because the company has already paid the annual premium. Changing the entitlement attitude does not happen overnight. Like any cultural change, will require the support from top management and their sense of passion, fairness and spirit of stewardship. More importantly, expectations need to be reset and managed.

Do you want to enhance your salary planning budgets or even the entire salary planning process? Contact us and find out how we can support you and your team in creating effective budgets and efficient processes.

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