Compensation Budgeting How-To: Develop Solutions for Pay Inequities

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At each level of the organization, and for each inequity you find, you’ll want to identify a resolution. A primary consideration, of course, is cost. How much will it cost to resolve the inequities you have identified? Are you able to absorb the inequities into this year’s increase budget, or are we talking about a larger amount that may take multiple years to resolve?

How critical is it that the inequities be resolved immediately? The biggest concern is the legal one. If you’ve identified any compliance-related inequities, the only solution is to resolve them immediately. Beyond that, there are concerns around attracting and/or retaining top talent, as well as employee engagement and morale. Be sure to develop multiple strategies for resolving the inequities. And, at all times, be thinking about how you will ultimately communicate changes to executives, managers and employees.

Design-Level Options

At the design level, you have a number of options for how to resolve pay inequities. Again, the question is, if we are paying low to market, what might we want to do about it?

  • The first option is to do nothing. If your strategy is high and compa-ratios and morale are good, you may get by for another year without needing to adjust your ranges to market.
  • Another option is to make small incremental change. The market may suggest moving your ranges by 3 percent or more; you could decide, instead, to move your ranges by 1 percent each year for the next few years.
  • You could decide to update your compensation strategy. Perhaps one function within your organization is more critical than others. You could move the ranges for that function, but not the remainder of your organization. Or …
  • You could decide to adjust all your ranges at once.

The solution you choose needs to be appropriate within the context of what’s currently going on in your organization, and what’s coming down the line. In some organizations, the sense of one for all and all for one is very strong, so it would be challenging to treat one function differently from the rest. In others, the need to communicate paying fairly to market is more urgent.

One thing that will help you in your decision making is to think about the cost of the various solutions:

  • How do you plan to do your increases for the next year? Just moving ranges doesn’t automatically necessitate doing individual increases. If anything, it helps make the ceiling a bit higher and gives a sense of potential to employees. Or …
  • Do you intend to maintain compa-ratios by doing an across-the-board market-based increase? If you plan to do this, how will you handle under-performers? Or …
  • Are you planning to do increases by position in range? If so, what’s the dollar impact of employees falling out of range in the green? How many former red-outliers may now be eligible for increases?

Position-Level Options

You also have options for how to handle inequities at the position level:

  • Keep the position where it is. You may have high compa-ratios, but that may be okay for this year.
  • Move the position to a new grade. Is this a hot job that may come down again in a few years? Or is this a new job that’s gaining momentum in the market? As you decide to bump jobs up a grade, keep in mind that it’s sometimes challenging to bump them back down. Think about how you’ll communicate grade movement to the managers and employees involved in the position.
  • You could also keep the position where it is, but offer a temporary market premium. Let the people in the position know that you acknowledge the position is hot right now, and to remain competitive, you intend to offer a premium on top of base pay.

In terms of budgeting position-level inequities, you’ll need to calculate the cost of moving your position to a new grade. Have you created any new green or red outliers? What’s the dollar impact? Or, what’s the cost of the market premium you’ll be offering folks in temporarily hot jobs? There’s an advantage to offering a temporary premium in the mid-term, in that your increases next year will be based on the same base salary as this year. This isn’t a long-term solution, however, as eventually the incumbents in that role will wonder why the organization doesn’t just adjust the grade up.

Individual-Level Options

At the employee level, the first consideration is to identify if there are any critical issues. Critical issues are those that would potentially lead to litigation around perceived discrimination. They would come up if you have identified pay inequities based on the Equal Employment Opportunity category. These are essentially not optional issues, and need to be resolved as soon as possible after discovery.

Other employee level issues aren’t as critical. Some of the considerations are:

  • How do you want to handle compression issues? Pay compression exists when you either have new incumbents in a role that are paid at or near the same rates as more highly tenured employees, or when your supervisors are being paid at or below the rates of those they supervise.
  • How will you handle disparate pay issues that aren’t related to EEO issues? Does your organization have or need multiple levels of the job? Are some incumbents paid either high or low to ranges based on tenure at the organization? Is there some reason for the disparate pay to be as is? Or is there an issue you intend to resolve by increasing some pay and freezing others?
  • Are there any concerns among your green outliers that won’t be remedied with a regular pay increase? If you have high-performing incumbents paid in the green, you definitely want to calculate bringing them at least to the bottom of the range. Sometimes, the number of employees being paid in the green is too much to resolve in one increase cycle. If this is the case, develop a multi-year plan to remedy the pay inequities .

For individual level inequities, start with the critical adjustments. From there, calculate the amount that would be needed to remedy any compression issues. Do you plan to give increases to supervisors and/or existing employees? And finally, calculate the amount and the process for targeting green-circled employees so that you can bring them closer to or within range.

Once you’ve calculated what it will cost to remedy pay inequities at the organizational, job and individual levels, you can then turn your attention to calculating increase amounts for your employee population.

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Have you discovered pay inequities at your organization? Tell us how you remedied them. Share your story in the comments.