Building a Salary Increase Budget

August 24, 2017



Here’s a shocker. Salary increase budget surveys are coming out from various sources (including Aon’s Salary Increase Survey) and the biggest surprise is how many different ways we can all say 3%. Sure, there is some splitting of hairs where we sometimes see 2.9% or 3.2%, but for all intents and purposes, the overall US market continues to be stuck at 3%.

If you’re leading the HR or compensation function, you’re surely facing challenges in coming up with the right approach for your company. On one hand, you hear from employees and line management about how continued small budgets that barely keep up with inflation are straining employees’ will. On the other hand, business leaders face the fire from investors about keeping costs in check. Striking a balance between those competing interests can be difficult, but we have combed through the practices section of the survey to highlight some practical tips you can use to plan your 2018 budgets most effectively.

1.  Differentiate Performance and Rewards

Even though the size of the merit pool is small, we believe it continues to be important for organizations to calibrate performance and identify the top performing talent. Typically, the increases awarded to the performers identified as being in the top 10% of the population are 150% - 200% of the middle of the road performers. We hear from some that the small budgets make it seem futile. Granted, the absolute size of the differentiation is small, but the message you send to those top performers can still be powerful.

2  Use Targeted Adjustment Budgets

Roughly one-quarter of the participants in the Salary Increase Survey reported using market adjustment budgets over and above their regular merit budget. If you do go down the path of budgeting separately for market adjustments, you may want to consider

  • Functions or business units that are strategically more critical,
  • Areas where turnover is highest, or
  • Areas experiencing the most difficulty in recruiting.

3.  Enhance Variable Pay

The most significant change we have seen organizations adopt has been the increased use of variable pay. The results in our 2017/2018 Salary Increase Survey show that trend continuing.

Extending variable pay plans deeper into the organization allows you to reward performance while not growing your fixed costs. We applaud those efforts. However, there’s still plenty of opportunity for organizations to improve. Over one-third of the organizations report having no differentiation in the size of variable pay awards based for top performers compared to average performers.

4.  Educate and Communicate

The outlook for big merit increase budgets is bleak, but effective organizations are spending the time and resources to communicate and educate their workforce. In one of our earlier blogs we shared “5 Tips to Communicating Salary Review Decisions”. All good advice, but one tip in particular jumps out that you should be putting in motion sooner rather than later. The idea of ‘arming the messenger’ stresses the importance of having your front-line managers fully conversant on the messaging you have put together around pay.

So when do we expect the logjam to break free and see larger pay budgets? We don’t have a crystal ball, but in all likelihood, this is the new normal.We expect to see variations reported in budgets based on industry or geographic region that will continue to be important for you to track.  But overall, we think CHRO’s and compensation leaders will continue to face the challenge for finding creative ways to operate in this era of tight salary budgets. Fortunately, our Salary Increase Survey will continue to be a great source for you to benchmark not just the size of budgets, but also the contemporary practices used to navigate the landscape. Contact us to learn more or to purchase your copy of the 2017/2018 survey.


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