Planning for Your Compensation Review Cycle

Compensation planning lives in the gray area between art and science. Companies are tasked with striking a balance between competitive strategy, operating objectives, and employee needs. As part of the planning process, companies often administer a once or twice per year compensation cycle, which covers compensation adjustments such as merit increases or bonus award payouts.

If you’ve ever been involved in the process, few words invoke negative feelings quite like “running a compensation cycle”. It involves endless amounts of time, bandwidth, feedback, and attention to detail. Not to mention the spreadsheets. And then, as a reward for finishing up your comp cycle, you get to start preparing for your next one almost immediately. 

But, by thinking through your strategy in advance (and heavily considering automating this process using software like Comprehensive), you’ll be able to reduce the timeline, uncertainty, and headaches surrounding your compensation planning.

Before formalizing compensation cycles or even adjusting compensation for employees, a company needs to make some high-level decisions. Gone are the days of being a 10-person company, making one-off changes at the drop of a hat. Now, it’s time to be intentional with changes - consider what, how, when, who, and why you adjust employee compensation.

1.) What is our philosophy for making compensation adjustments?

Companies typically lean into one of the following three ideologies: merit-based pay, internal equity, and competitive pay.

How a company weighs each of these ideologies can and should change over time. In the early stages of hiring, a company needs to get bodies in seats and will likely focus on competitive pay. As a company scales, they might consider incorporating elements of internal equity and merit-based pay depending on company values.

An effective compensation philosophy will likely necessitate elements of each ideology: Employees want to know they’re paid competitively, they’re rewarded for their efforts, and they’re not making less than their colleagues for the same job.

1. Merit-based Pay: directly aligned with performance - if you do well in your role, you’ll earn higher compensation as a direct result.
2. Competitive Pay: highlights the external factor of market competition and typically favors technical roles for which there is the highest demand. Pay more for the jobs you need.‍
3. Internal Equity: necessitates significant calibration and analytics - you’ll want to assess all different groups and make sure compensation is consistent for each job family, level, across departments, genders, ethnicities, etc.

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Tips to put this in practice:

Think about the optics of communicating compensation philosophy to employees and what will be the most motivating for your employees.

Relying solely on one ideology can lead to inconsistent and non-competitive practices. Consider all three to inform a scalable and incentivizing approach to compensation.

2.) How do I determine my budget?

Budget is often the main factor in deciding which employees will get an increase and for how much. Finance and HR should work closely together to align on a number that considers two factors:

1. Financial constraints of the company
2. Desire to retain top talent

When determining the appropriate harmony between the two competing priorities, companies should first assess current employee sentiment towards compensation.

If employees feel that they are paid fairly and competitively, then the company has more leeway when it comes to budget limitations. When starting off from a positive employee perspective, a company can work more closely in the confines of their budget knowing that employees feel properly compensated.

If employees feel under-compensated before a company aims to do increases, then a compensation review cycle will likely necessitate higher increases and therefore the desire to retain employees may become more of a priority.

In all instances, companies should consider their workforce as the primary asset and strive to provide increases that reinforce employee value.

Tips to put this in practice:

If budget constraints are a concern, companies can consider prioritizing increases based on tenure, department, performance, etc. to ensure the limited resources are targeting the correct individuals.

One-time bonuses can also be utilized when budget is limited - employees still receive monetary recognition for their contribution, but the company is not required to increase cost on an ongoing basis.

3.) When is an employee eligible for a compensation change and why?

Employees typically receive comp changes for the following reasons: Role Change, Market Adjustment, COLA, or Merit Increase. Once your company has determined which of these scenarios necessitates a change in compensation, then you can work, in conjunction with Finance, to fit these into the budget.

• Role Change: 99% of the time, this is for a promotion. Promotions typically require the employee to exceed one year in their current role and attain a certain performance rating. A common increase rule is to give promoted employees the greater of: (a) 10% raise, or (b) whatever amount is required to bring their current salary up to the low end of their promoted-into salary range.
• Market Adjustment: Companies can consider a market adjustment for certain roles if there’s been a big shift in the competitive landscape, and as a result, their compensation is no longer competitive. Typically, increases will consider an updated set of ranges and will give employees raises so that their current salary is at or above the low end of the updated salary range.
• COLA: Cost of Living Adjustments (COLAs) are similar to market adjustments – however, they usually consider the entire company, sometimes by location. COLAs are not based on ranges – instead, employees receive a minimum annual increase to account for inflation (ex. 2-3%).
• Merit Increase: Performance-based increases are meant to reward high performers and necessitate that a comp cycle be run in conjunction with a performance review cycle. Companies usually allocate between a 0% and 7% raise depending on performance rating. Employees' position within their salary range (i.e. their Compa Ratio) can also be considered in merit increases.

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Tips to put this in practice:

Small adjustments to eligibility can have big impacts. You may need to adjust a few levers to ensure you’re staying within budget, while still prioritizing retention of top talent.

As an example of a tenure adjustment, reference the employee’s last increase date and start date so that anybody with an increase within the last year will not get another one.

As an example of a department adjustment, make certain departments ineligible for increases and focus budget towards the most competitive/hardest-to-hire roles.

As an example of a performance adjustment, decrease the raise % that lower performers get in your merit matrix (see example above) so that employees who are performing below average do not get any increase.

4.) Who is involved in the process?

Another balance companies need to strike is who to include in a review process.

Including lower level managers necessitates educating more employees on how compensation works at your company and how they should make raise decisions. However, restricting compensation decisions to high-level executives, while administratively easier, limits transparency within the organization and the insightful feedback provided by direct managers.

The goal is to incorporate feedback from managers who are more in tune with what is needed for employee retention, while ensuring company-wide compensation is changing in a way that is equitable and scalable.

Once you’ve decided the appropriate level of inclusion for your organization, you’ll need to solicit recommendations from those reviewing managers. These recommendations should then go through an approval process, working their way up through the organization's hierarchy.

Reviewing managers will communicate directly with employees when compensation conversations arise, so consider them an extension of your executive team. They should understand compensation decisions and limitations, and there should be alignment across the organization.

Tips to put this in practice:

The more managers you include, the more bandwidth and discretion required. This typically necessitates separate spreadsheets for each leader, which can introduce stale data, limited visibility across the organization, human error, and wasted time when trying to reassemble. Consider automating this process using software like Comprehensive!

Consider manager training sessions to cover relevant topics such as compensation philosophy, budget, level of discretion each manager will have, and any other unfamiliar areas such as pay bands, Compa Ratio, performance rating impact, etc.

5.) Why is effectively communicating results crucial to success?

Not properly setting employee expectations regarding compensation can lead to misalignment between expectations and reality, causing dissatisfaction and turnover.

The onus is on companies to clearly and effectively communicate what employees should expect in terms of how often adjustments are made and how the amounts are decided.

Compensation is communicated to employees in a number of ways, most commonly:

• Award letters: Award letters allow companies to communicate and document compensation adjustments, bonus payouts, and equity grants in a visual and branded manner.‍
• Total rewards statements: Employees often underestimate their total rewards by focusing only on Base Salary or OTE, but total annual compensation also includes equity grants (both projected and actual value of equity), benefits, and bonus payouts. By providing total rewards statements, a company can illustrate to an employee that their compensation is, in reality, much higher than they had realized.

Tips to put this in practice:

Total rewards statements can be extremely time consuming to produce and become stale almost immediately. Technology like Comprehensive can turn a turn a one-time statement into a real-time dashboard where employees can always go to understand their current compensation.

Consider manager training sessions to cover relevant topics such as compensation philosophy, budget, level of discretion each manager will have, and any other unfamiliar areas such as pay bands, Compa Ratio, performance rating impact, etc.

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Introducing: Comprehensive Compensation Management

Compensation planning is already hard enough. There are a million things to consider, competing priorities, and moving pieces that all need to be sorted, solved, combined, distributed, and communicated with a nice pretty bow in a very limited time.

This is where Comprehensive will throw you a life preserver! Comprehensive is an all-in-one compensation management platform for automating compensation reviews, communicating total rewards with employees, benchmarking, and managing pay ranges – with integrations to existing HRIS and performance management tools.

Once you’ve made your compensation decisions, our platform will put all those decisions into practice, without the need for a single spreadsheet! Reduce the time and energy required to administer your initiatives, while increasing trust in all things compensation.

Comprehensive is the most customizable, cost-effective compensation management software. It’s easy to use and offers high-touch support with the promise to get you up and running in under 2 weeks.

Ready to simplify how you run your compensation reviews? Let’s chat!

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