Written by Megan Nail, SVP, Total Rewards Practice. If you're looking to make some adjustments to your total rewards strategies to mitigate potential talent challenges, please contact Talent Solutions.
Are you thinking about salaries? Are you wondering if you should adjust your salary structure annually to keep pace with the market? Are budgetary pressures, economic concerns and tight job markets forcing you to reconsider everything? If you have a swirling storm of factors to consider relative to determining salaries, you are not alone.
What should I do? I'm glad you asked. Here are three approaches to tackling this important challenge.
Approach #1: Increase Your Salary Structure and Ranges Annually (Aging)
This approach typically involves applying a common percentage increase to your entire structure, so all minimums/midpoints/maximums are raised.
The advantage to this approach is it keeps pace with the market, so you aren't “lagging.” You are staying competitive.
However, there are few disadvantages.
- For certain positions that don't keep pace with increases in the market, you can find your pay band moving ahead of the market. That may not be a huge problem, but it's good to have the latest market survey data to ensure you're not getting too far out there and are keeping in sync with nuances in your particular market.
- Another disadvantage is that managers may feel as though their employees aren't progressing in the range they're in at the moment. For example, if you are moving the salary ranges by 2% and then have a 3% salary increase budget, it could be a challenge for some employees to merit the full budget.
Approach #2: Keep Your Salary Structure Consistent and Reevaluate Periodically with a New Market Study
It's advisable to complete a market compensation study for the entire organization at least every three to five years (and more often for in-demand positions like tech and analytics roles).
The advantage to this approach is you will have good movement into the range (i.e., range penetration) for employees.
The disadvantage is you may be lagging the market and be less competitive, especially for new hires or in-demand skills. In addition, you will likely have larger adjustments when you do the market study and may need to budget extra dollars for market adjustments at that time.
Approach #3: Create a Combined Approach
My preferred recommendation is to typically take a combination approach. This means you age your salary structure annually and then check the structure against market in three to five years. When you age your salary structure, make that percentage lower than the anticipated merit increase budget.
For example, if this year's projected merit increase budget is 2.7%, I would recommend only aging the structure 1.5% to 2% at a maximum. This does several things. It helps to mitigate the possibility that you will outpace the market (especially in a down economy) but keeps you competitive and lowers the potential gap when you complete a market study again in a few years. It will also give your employees a chance to progress in the range, which is a positive reinforcement of your compensation philosophy and approach.
The Bottom Line
Take the approach to salaries that is consistent with your talent strategy and compensation philosophy and accounts for disruptions you may have experienced this year.
