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September 16, 2010

Presenting Salary Budget Recommendations

Filed under: Compensation,Salaries & Pay7:20 am

By Christine Goodman, CCP, SPHR
Director, Compensation Analysis, HRN Management Group
Published in September, 2010 HRN CompNews

In order to make a salary budget recommendation, one of the first considerations is to ensure the executive team knows and understand your organization’s compensation strategy.

The compensation strategy should align with the organization’s overall mission, business goals, and objectives. Today’s compensation packages encompass pay, benefits and work-life balance and the compensation strategy should be designed to implement and administer the compensation program to deliver these packages to your employees.

Your executive team’s support of the compensation strategy is important to proceed with the salary budget planning process. If you have a formal compensation strategy in place, you can determine the desired competitive position your organization wishes to adopt. Where no formal compensation strategy exists you have the opportunity to develop one and position yourselves in the coming years, to gain or regain your own market competitive position.

In the salary budgeting process there are two areas of focus: the salary range increase and the salary budget increase. Both support the compensation strategy, and in the long term achieve your desired competitive position.

The salary range increase is relatively easy to decide as this is based on the market data movement. The salary budget recommendations are influenced by more factors. Do you as an organization have to budget more or less aggressively to regain ground after a salary freeze following the recent economic situation? Is there a need to adjust compa ratios to align with the market? Do you want to be a market leader? Establishing a 2011 salary budget should be based on financial resources available and current market position.

Compease [HRN Management Group compensation administration solution] makes it easy to accomplish this internal review. We suggest starting with the following four reports to get a feel for any outliers:

Compa-ratio report by compa-ratio This report displays compa-ratios from highest to lowest. It allows you to select jobs at either end to review.

Compa-ratio report by job grade The majority of employee’s compa-ratios should fall between 80-120%. Those higher or lower than the range should be reviewed to ensure the jobs are evaluated correctly.

Compa-ratio report by time in position This report will help identify employees with compa-ratios that do not seem to match their time in the position. Also, use this to verify that high performance employees are where they should be in the range based on their tenure.

Job Evaluation Summary Report by Job Grade This report displays all evaluations listed from top to bottom. It is also helpful to print the Job Evaluation Summary Report Compensable Factors for reference. Start at the bottom for each of the eight factors and work your way up the report reviewing any that do not seem to match the definition or that are clearly different from other jobs in the same grade. We call it the “sore thumb report” as it is obvious when a factor level is too high compared to the other jobs in the same grade.

When reviewing the compa-ratio exceptions that you have identified keep the following general guidelines in mind:

  • As a general rule, 90% of the people in the same or comparable jobs are paid between the minimum and maximum rates established by the salary range.
  • In a pay-for-performance system, employees are ultimately paid at a rate that is comparable to their long-term performance:
    - below market for marginal performers
    - at market for employees who meet performance expectations
    - above market for employees who exceed performance expectations.
  • The overall expectation is that good employees are paid at a rate competitive within the labor market and, as a result, makes it difficult to recruit them away from the company.
  • Compa-ratios between 80% – 90% are considered entry rates. New employees are generally hired at these rates.
  • Compa-ratios between 90% – 97% are considered appropriate for employees who are not yet fully trained and qualified for the position.
  • Compa-ratios between 97% – 103% are considered appropriate for employees who are fully qualified for the position and who, over time, consistently perform at an acceptable level.
  • Compa-ratios above 103% are appropriate for employees who are fully qualified, and over time, consistently perform above acceptable levels.

These general guidelines may help you determine how your employees are positioned from a pay perspective assuming acceptable performance levels:

  • Entry level non-exempt positions (grades 1-5) should reach the mid-point level within 1 to 2 years.
  • Mid-level non-exempt positions (grades 6-7) should reach the mid-point level within 2 to 3 years.
  • High level non-exempt/entry level exempt positions (grades 8-9) should reach the midpoint within 3 to 4 years.
  • Mid-level exempt positions (grades 10-12) should reach the mid-point within 4 to 5 years.
  • High level exempt positions (grades 13-14) should reach the mid-point within 5 to 7 years.
  • Executive level positions should reach the mid-point within 7 to 10 years.

You should expect to find some employees are currently being paid outside the range limits for their job grade. Some will be below the range minimum and some will be above the range maximum. We recommend the following approach to resolve these issues:

Compa-ratio is below 80% (75% if Executive) Our merit matrix recognizes any out-of-range situations and will make adjustments tothe recommended merit increase to address the problem. Below range conditions may require more than one merit increase cycle to resolve. Once the compa-ratio has dropped to within the range limits, the regular merit increase schedule will take effect.

Compa-ratio exceeds 120% (125% if Executive) Employees paid at or above the maximum of their salary range should still receive a merit increase based on the normal merit increase schedule. However, the merit increase percentage is given as a lump sum payment rather than an increase to the employee’s base salary.

If you need assistance with the internal review process, we can provide a variety of support levels from individual job evaluation reviews to an onsite meeting and re-evaluation project. Please contact HRN Client Services at or by phone at 800-897-3308.


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