This is an excerpt from our budgeting how-to whitepaper. Download the full version here.
At this point, we have calculated our pay inequities at the organizational, job and individual levels. We’ve also calculated our increases and determined the actual amount we intend to give our employees. What we need to do now is put it together on a budget increase request sheet.
At the organizational level, the question you’ve answered is whether you need to make any range adjustments. These would be necessary if your ranges fall out of alignment with your market and you have determined it’s time to adjust your ranges up.
There are two ways to handle range adjustments:
- You can decide to maintain your compa-ratios by adjusting every employee to the same compa-ratio in the new ranges. In this case, the cost will be equal to the percentage that you are increasing your ranges. For example, if your total payroll budget is $15 million and you increase your ranges by 2 percent, the total impact is $300,000.
- If you instead decide to ensure there are no green outliers, the cost of adjusting your ranges would be equal to the adjustment necessary to keep all employees within range at the low end. So for example, if the adjustment to your ranges result in underpayment of your employees by $9,200 that would be the increase amount you would need to budget.
At the position level, the way we’d correct inequities would be to make market adjustments. These would need to happen if you examined your positions relative to the market and determined that some are in fact outliers relative to the market. Outliers happen either when you have positions that fall low to market or when you have positions that fall high to market. There are two options for making market adjustments: moving to a new grade or offering a market premium.
The first option would be to move the position to a new grade. In that case, the budget question to ask is what would be the cost of ensuring all incumbents are within range for the new grade? If you decide to move your positions to a new grade, watch your internal equity. For example, if you have a Driver I and a Driver II in grades 1 and 2 respectively, it wouldn’t make sense to move your Driver I up to grade 2 without also adjusting your Driver II to a grade 3.
In the above example, the cost of the market adjustment to enter on your budget increase spreadsheet for both the Driver I and the CSR position would be 500 total.
The other option for doing market adjustments at the position level would be to offer a market premium. A market premium is a bonus payment paid out to those employees in a job that may be temporarily high relative to the market. For example, software developer jobs are currently hot in the Seattle market. For jobs that may fluctuate both up and down in the market, it may make more sense to offer a temporary market-based premium to incumbents in the role. This way you can both encourage retention of those employees, without risking overpayment in the future.
[clickToTweet tweet=”A temporary market premium encourages retention w/o risking overpayment in the future. #compensation” quote=”A temporary market premium encourages retention w/o risking overpayment in the future. #compensation”]
To calculate the budget amount, determine the yearly market premium payment to all incumbents in the role. The advantage of doing a market premium rather than adjusting the grade is that it’s easier to take a premium away than to reduce base pay down the line. It’s also easier to stop giving a market premium than to move a position down a grade in your structure later.
One other option, if you find that you have a whole function that has jobs that are trending up and down rapidly, is to build a temporary alternate structure for that hot function in your organization. Then you can more easily adjust the ranges, and communicate that clearly to your employees once the demand for that job function cools off.
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