Breaking your own rules (the right way): managing exceptions during pay increases cycles

Managing exceptions means balancing the “rulebook” with reality.

While you may not control every budget decision, you can (and should) diagnose and document every exception.

We’ll walk you through common reasons for exceptions and best practices for documenting them.

But let's start with the basics.

What is an exception in compensation management?

Exceptions occur when employee compensation falls outside their pay range.

Their pay might exceed the maximum of their range or fall below the minimum, and this might be an intentional decision. In either case, your annual merit cycle offers the opportunity to document exceptions and reconcile pay misalignment when warranted.

HR practitioners will often “circle” these employees.

Red circling: In HR lingo, “red circling” typically means freezing pay increases for employees who exceed the max of their range. Red circling may occur because an employee has been in the same role for a long time, receiving regular pay increases that organically push them over their max. It might also result from changes in the market, demotions, promotions, or a shift in your company’s pay practices.

Green circling: Green-circled employees are the opposite. They are paid below the minimum of their pay range. Maybe a manager recently promoted an employee, but their skills don’t qualify for the minimum of the range.

How should you treat “red circles” and “green circles” where exceptions are warranted during your pay increase cycle?

A good rule of thumb for HR practitioners? Bring your “green circles” into range before approving other exceptions.

Common reasons for merit increase exceptions

Even organizations with rock-solid compensation programs and pay philosophies will face exception requests. The difference between managing exceptions well and letting them spiral out of control is about understanding the reason behind them.

Let’s go through some of the most common exception scenarios.

Employees with a long tenure in the same role

Someone who’s been in the same position as an individual contributor for a long time might exceed the top of their pay range. Do you freeze their pay or make an exception and continue to give them pay increases?

It depends on many factors. Is the employee a high performer? Do your pay ranges accurately reflect changes in the market? Is it possible to promote the employee to a new position with a higher pay range? If not, and you don’t want to give pay increases, can you reward them with a lump-sum bonus or other perk (such as additional PTO)?

Rewarding loyalty and retaining institutional knowledge matters but so does maintaining your pay structures.

M&A activities

When two companies join forces, so do their comp structures and pay philosophies. Many companies make a critical mistake following a merger or acquisition: they begin consolidating jobs without first benchmarking them with the same data set.‍

This is a recipe for disaster and turnover of key talent. Until you “harmonize” your two companies’ jobs with fresh pay ranges based on function and responsibilities (regardless of legacy titles), exceptions will likely exist.

Misaligned job titles and employees in the wrong role

Job titles may not reflect actual responsibilities or duties. Sometimes job titles stem from historical decisions or organizational conventions. They may fail to capture the complexity or specialized skills required for some roles.

Employees might also be in the wrong role. For example, Executive Assistants that have been in the same position for decades often exceed the pay range for their position. Sometimes the solution is a promotion to Operations Manager. Promoting an employee or changing their job title to more accurately reflect their responsibilities removes the need for another exception.

Demotions and promotions

Moving up or down the org chart can push employees outside their pay range. When promotions or demotions happen mid-year, employees may need an exception during merit cycles.

For example, a manager may request that a red-circled employee still receive a 3% pay increase because they were recently demoted from a managerial position to an individual contributor after a departmental re-org. They show plenty of leadership potential, but don’t have anyone to lead at the moment. Their salary exceeds the maximum for their new role, yet the manager wants to reward their strong performance and potential.

The question we must ask now: when do all these individual exceptions indicate a systemic problem?

Do you have an exception issue?

While some exceptions should be expected, granting too many every pay cycle points to a larger problem.

Take a step back and look for patterns. Those exceptions are telling you something about your compensation program.

• Are your pay structures living in the past? If you’re constantly getting exception requests for every Software Engineer, your pay ranges may not reflect the actual market.

• Is your pay increase strategy a secret? When managers don’t understand your approach to pay increases, they make up their own rules. Having clear guardrails and recommendations for managers prevents ad hoc pay decisions that undermine your compensation program.

• Are your hiring practices sabotaging your pay structures? If every new hire in Sales is onboarded as a “red circle,” that’s not a coincidence. It’s your talent acquisition team waving the white flag. When recruiters and hiring managers consistently exceed your pay ranges to land candidates, it might mean your ranges are too low for your talent market.

When exceptions multiply, it’s not just an operational problem requiring a tighter workflow. It’s your compensation practices sending you a signal that something needs fixing.

Best practices for documenting exceptions

Your merit cycle doesn’t end after employees receive their yearly pay increases. The most overlooked step in managing exceptions is what happens next: documenting your decisions.

Record the rationale for every exception

If managers are expected to own pay decisions, they should provide a rationale for every exception. The same holds true for HR. Whether you’re approving, modifying, or denying an exception, keep a record of the reason why.

Don’t accept “high performance” as the documented rationale

When managers request exceptions for high performers ask: What’s the evidence and why doesn’t their pay range accommodate excellent performance? Ranges exist to reward people for doing their job well. If someone doesn’t fit within their range, maybe they’ve outgrown their job. Maybe they value the stability of their work and there’s no career path for them to grow into. In that case, it’s important to document this as the reason behind the exception.  

Give exceptions an expiration date (when you can)

Sometimes you will want to bring in a new hire above or below the range for a specific reason temporarily. Maybe there is a new Sales hire that you are paying above the max of their range because they brought a depth of knowledge about your product and a “rolodex” of potential prospects. But you also (smartly) set an expiration data for this exception of two years with a plan to promote this employee when they are more established.

Setting expiration dates for exceptions allows you to revisit them during pay cycles and decide if the business case still makes sense.

Use technology to document exceptions

If you’re still using spreadsheets to record exceptions, you don’t really have a suitable system for compensation review. Document exceptions in your HRIS or (better yet) introduce a dedicated merit cycle solution. Technology makes managing exceptions significantly easier. While your HRIS can flag exceptions and expiration dates, a dedicated merit pay management system like Paycycle gives you greater control still over your year-end cycle.