Comp budgeting 2: How to calculate raises

Tessara Smith, PayScale

In the first article of this three part series on budgeting, we talked about resolving pay inequities. After you’ve resolved pay inequities, it’s time to thing about pay increases. Increasing compensation for your employees is a great way to keep your team motivated and is essential to retaining the talented individuals that you have recruited. However, before calculating salary increases, you should strategize how you will do this in relation to your company’s budget. Generally speaking, paying per performance is the most cost effective way to go about rewarding your employees, but there are a few other methods that are also worth mentioning.

Methods of Increasing Compensation

There are a few different methods you can use to calculate raises depending on what you want to base increases upon. Market trends, proficiency, and tenure are all classic strategies of rewarding employees. However, tenure is not always the best strategy because it lacks incentive for employees to meet company goals. It may seem logical to reward employees based on how long they have been with the company but, it is wiser to opt for other methods.

The two more successful strategies for implementing increases are market based increases and proficiency based increases. In market based increases, you first determine the overall budgeted raise percentage for your organization. Then, allocate these raises to employees based on how far they have progressed through their ranges based on the range penetration for your employees.

A different way of implementing increases is by using proficiency based raises. To use this method, first tier your increases by position in range by each employee’s proficiency. Start with the overall budgeted raise percentage, then allocate interests to employees based on both range penetration and performance. This method allows rewards to star employees who are working hard to insure that your company thrives.

Streamlining the Compensation Increase Process

The next thing to think about is how you are going to go about smoothly integrate these changes. Before creating a salary increase plan, you need time to do a market study (or, better yet,  just use PayScale to automate this for you) and plan your performance cycle to end before your pay cycle starts.

Another thing to take into consideration is whether you are going to utilize focal or anniversary increases. Focal increases are when you implement all of your salary changes for your employees at the same time and anniversary increases are where you base your increases on the hire or promotion date of the particular employee. Depending on your organizational values for transparency and inclusion, you will need to determine who will be deciding on the increases and who will be included in the overall process. As mentioned before, you may want to include your managers. In any case, you will need to decide on how quickly you want to implement the new salary changes and when your managers or executives will be available. If your important team members are occupied during this time of great change, this can significantly hinder the increase process. The process may seem long and tedious but once completed will ultimately will prove to be beneficial for the company as a whole.

Want to learn more about budgeting and calculating raises? Get the full story with PayScale’s complete complete guide to Compensation Budgeting. It’s free!

Check out these related posts