Compensation Budgeting How-To: Prepare Summary Budget Request, Part II


This is an excerpt from our budgeting how-to whitepaper. Download the full version here.

We’re continuing our discussion on preparing summary budget requests. We’ve covered your options for making range adjustments and market adjustments if needed, and today we’ll look at equity adjustments and pay-increase adjustments, as well as a sample summary report.

Equity Adjustments

When you identify inequities at the employee level, the types of adjustments you make are simply called equity adjustments. After doing your homework on employee-level inequities, you may have identified some issues around compression or Equal Employment Opportunity (EEO) issues. EEO issues are not considered optional to correct and need to be addressed as soon as possible. You would do this by determining the amount to resolve the critical issues. Let’s take a closer look with the example below.

In this example, we have a male and female in the same role. The female is below range and the male is well into range. This could potentially be perceived as discrimination, and leaves the door open for a lawsuit. To resolve the issue, you would need to bump up the pay for Vanessa Gonzales to at least the bottom of the range. The budget would reflect an equity adjustment of $3,700.

In the example shown above, we have two employees in the HR area. The manager is being paid less than the HR generalist, so we would most likely want to increase the HR manager at least to the bottom of the range. In this case, the fix in the first example resolves also the problem in the second example, so we would want to ensure that we are not double counting that increase in our budget calculation.

Finally, in terms of employee-level inequities, you should ask yourself, are there any other necessary market adjustment for individuals to include on your budget calculations?

EEO issues require action & need to be addressed as soon as possible. More on comp adjustments >>Click To Tweet

Pay-Increase Adjustments

After budgeting any pay inequities you may have identified in your organization, we then turn our attention to budgeting the pay-increase amounts. Typically this is the easiest to budget as it is usually a percentage of the total salary budget. For example, if your budget is $15 million, the total increase adjustment would be $450,000. You would enter $450,000 as the line item for pay increase adjustments on your compensation budget request.

Summary Report

Below we can see an example of a summary compensation budget request. Each of the types of adjustment that we have calculated has its own line item. The example could represent an organization of about 250 employees with an average pay of about $60,000.

The organizational-level inequities show up as range adjustments. Job-level inequities appear as market adjustments. And employee-level inequities are entered as equity adjustments. The pay increase adjustments of course show up on the fourth line. The total budget increase percentage, including the inequity adjustments comes to 3.23 percent. This is a fairly conservative estimate reflecting some very conservative choices. The nice thing about this example is that the organization could use a budget of 4 percent and have some room left for discretionary payouts throughout the year. This could include spot bonuses or other things you might want to reward with your compensation dollars. Or, you could use this .76 percent as wiggle room for opportunities that might arise unplanned.

As backup for this summary page, you would also want to gather and include your detailed analysis of all of the increase calculations that helped you develop the summary budget recommendations. Note: You can eliminate all this spreadsheet business with modern compensation software.

Once you have developed your summary compensation budget request, with supporting documentation, you’re ready to begin communicating with your executives about the request. Be sure to clearly communicate the importance of each line item, and the value of both accomplishing the organizational goals and the business objectives.

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