Compensation Budgeting: Determining Merit Pay Increases

Perform Efficient Compensation Planning for Merit Pay Increases

We are in the post-season for HR. It’s open enrollment time, flu season and, for a lot of organizations it’s also the time of the year for performance management and merit pay increases. Basically, there’s so much to do and so little time to do it. Welcome to human resources. Did anyone tell you it was going to be like this? Probably not.They also probably forgot to tell you that you would do this event-based activity on top of all of your normal day-to-day hr tasks including employee relations issues and recruiting. But, you are a superstar who can manage an employee relations issue in between phone calls with your benefits broker while drafting a revised sick leave policy to account for the swine flu epidemic.  Now, if you could just get some help from your managers. But, here’s the toughest part – your managers need help from you.

How to Involve Managers in Performance Evaluations and Merit Pay Increases


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Your managers know that your organization has formal salary ranges. They know they have to write and conduct performance evaluations and they know they have the task of handing out the 2009 pay raises. But, bringing all of these elements together may be harder than you think for them.

With so many variables at play for how to give out raises, your managers may be tempted to ignore all of the guidelines and advice you’ve given them on determining pay increases for employees and instead hand out increases based on what’s easiest. What do I mean by that?

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What’s easiest could be giving out pay increases “evenly” or, worse yet, according to how well they like a person. It’s our job as HR practitioners to make sure that we give our managers the tools to quickly and easily follow the guidelines we set out.

In a previous post we talked about how to give out increases by using the information about your employee’s placement within the range (called compa-ratio) with a score from their performance evaluation. These two factors in combination should equate to an appropriate increase based on your organization’s human resources budgeting.

How to Collect and Manage Performance Evaluation Information

Being able to quickly organize employee salary and performance data can help a lot with assessing and handing out increases. There are various ways to do so, from an Excel spreadsheet to special software. Below is a screen shot of a PayScale tool which helps managers and HR practitioners view their employee’s salaries, compa-ratios and performance rating all at once.

This type of information, complied in this way can make it 1) easier for your managers to determine pay increases based on your guidelines, and 2) make it quicker and easier for you to audit the pay increase decisions of your managers.  Tools like this can help you take one more to-do list off your list.

This is a case where technology, when leveraged appropriately, can be HR’s new best friend.  Unlike when one of your employees is complaining about their job on Facebook. That may be something else to consider come merit increase time.


Stacey Carroll, MBA, SPHR
Director of Customer Service and Education at PayScale, Inc.

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