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How do you approach allocating compensation dollars into a salary budget? Managers throughout your company must work together to budget dollars for salary and help control healthcare and other miscellaneous benefit costs.

Research

Carefully research salary ranges to determine pay rates by geography and industry. Look at all jobs and determine what work is done and how the job is slotted. Establish salary ranges that match all job descriptions.

Be sure to check routine salary ranges to reflect current compensation trends in your industry. How competitive are particular jobs, and what is the external market demanding? Is it a growing or dying profession? This information will help stem the loss of valuable employees.

Process

A structured performance management process ensures that employees are meeting corporate objectives that can be assessed on a regular basis. Include annual goals, performance appraisals, and a system for coaching and mentoring employees. HR can help managers positively influence employee engagement and productivity.

Of course, you must make sure a well-defined compensation strategy incorporates legal requirements so your company is in compliance with all federal and state laws. This process works to eliminate biases made in hiring decisions and ensures compliance with the Department of Labor’s fair labor standards regarding minimum wage, overtime pay, and the Lilly Ledbetter Fair Pay rules.

Work with managers to establish a structured administration of compensation: annual review process, salary audit, and a raise process timeline. As a final and ongoing step, ensure that managers know the areas and deadlines for which they are responsible.

Take the long view to help managers create an environment that both recognizes and rewards employee performance, helping to establish a strong culture of employee engagement.

Strategy

You might want to work with consultancies that provide salary-leveling information. Once you have this information, you can decide on percentiles for your own companies. Do you want to pay employees in the 50th percentile of the industry range, or something different?

For each job classification, a standard salary is then fixed with a range above and below to account for negotiation, seniority, and performance variations – based roughly on the range given by the consultancy. It’s crucial to develop a salary budget that will be sufficient to retain your best and brightest. But it also has to be one top executive who will approve.

Depending on the specific labor market in which you compete for talent, 2 to 3 percent merit increases most likely will not be a strong retention tool. To keep your key contributors and high-potential employees, you may need a bigger salary increase budget or limits on who receives increases if you do not have the budget.

Retaining employees may be a key strategy in supporting organizational growth. Alternatively, you may choose to provide a reduced pay increase budget, as strategically you may be encouraging employees to move out of the organization.

Whatever you do, be sure individual managers and your CFO work closely together, so everyone understands the needs, and limits, of your personnel management, going forward.

Originally published 10/14/22 - Updated 1/31/23