Planning for Your Compensation Review Cycle

Compensation planning lives in the gray area between art and science. Companies are tasked with balancing competitive strategies, operational goals, and what their employees truly need. As part of this adventure, many companies settle into the rhythm of a once or twice per year compensation cycle. This cycle covers all sorts of adjustments, like merit increases and bonus payouts, with the aim of keeping everyone feeling appropriately valued.

If you’ve ever been involved in the process, the words “running a compensation cycle” probably bring about a feeling of dread. That’s because you know that this endeavor involves endless amounts of time, brainpower, feedback loops, attention to detail and the ever-present spreadsheets. And just when you’ve finished one cycle, it’s time to prepare for the next (sigh).

But fear not! By crafting a solid strategy upfront (and maybe even adding some handy software like Comprehensive), you can actually streamline the whole process. That means less stress, fewer surprises, and more time to focus on what really matters.

Before diving into the nitty-gritty of compensation cycles, take a step back and put some thought into the bigger picture. Maybe the company has outgrown its old model, or there are new pay equity goals. Whatever the impetus, it’s a great time to be intentional about your new compensation strategy. If you can base your compensation decisions on a thoughtful architecture, you'll relieve much of the pressure from compensation planning and make life easier on everyone (especially your HR team).

1.) What is your philosophy for compensation reviews?

Companies typically lean into one of the following three compensation ideologies: merit-based pay, internal equity, and competitive pay. A balanced compensation philosophy requires all three, but they may not all be weighted equally, and that’s okay.

How a company weighs each of these ideologies can and should change over time. In the early stages of hiring, a company probably just 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 require 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; ie. 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.

Tips to put this in practice:

Consider how your employees will feel about the way you talk about compensation philosophy and how it relates to your company’s compensation goals.

Relying solely on one ideology can lead to inconsistent and non-competitive practices. Consider using a mix of all three to create a compensation plan that’s fair, flexible and keeps everyone motivated.

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2.) How do I determine my annual compensation cycle budget?

Budget is a big deal. It's a delicate dance between financial constraints and the desire to keep top talent happy. To set a budget for compensation, Finance and HR will need to cozy up and align on how much cash is available and what’s needed to meet compensation goals.

Too little? Good enough? Just right? Before doing anything else, figure out how employees view their current compensation. This is an important piece of information for determining how much budget to allocate toward the next compensation cycle. If employees feel that they are paid fairly and competitively, then the company has more leeway. 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 the team feels like they are not getting the compensation they deserve before the company starts handing out raises, that’s an indicator that it might be time to bump them up a bit more. Keeping your best employees happy will make them want to stick around, and turnover is far more expensive than properly compensating the employees you already have. 

In every situation, remember that your workforce is your biggest asset. Aim to give raises that show your employees how much you value them and the hard work they do. After all, happy employees make for a happy company.

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 are a great tool to use when the budget is limited—employees still receive monetary recognition for their contribution, but the company is not required to increase cost on an ongoing basis.

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

Here’s the biggest question yet: when do employees get a raise in compensation, and why? Is it a role change? A market adjustment? Or maybe just a boost to keep up with the cost of living? Whatever the reason, it’s essential to ensure everyone is on the same page. HR needs to work in conjunction with Finance to fit these into the budget and compensation review process.

• 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. Employee’s position within their salary range (i.e. their Compa Ratio) can also be considered in merit increases.

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.

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.

Example of a department adjustment: Make certain departments ineligible for increases and focus budget towards the most competitive/hardest-to-hire roles.

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.

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4.) Who is involved in the compensation review process?

Another balance companies need to strike is who to include in the decision-making process.

Getting lower level managers involved means spreading the word about how compensation works at your company and guiding them toward making the right pay decisions. It might take a bit of extra effort, but it can be worth it! Keeping compensation philosophy and decisions at the top might seem easier logistically, but it means that companies miss out on valuable insights and transparency that direct managers bring. Keeping everyone in the loop is a great way to make sure all voices are heard.

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.

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5.) Why is effectively communicating compensation 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 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. This step helps ensure that communicating pay changes is a valuable conversation for both the manager and employee.

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Introducing: Comprehensive Compensation Management Software

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 (hooray)! 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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