Compensation cycles (i.e. in the form of annual reviews, merit increase processes, salary/bonus rounds, etc.) are one of the most important flows to get right as a company, and there is diversity on how to optimize that process.

Determining appropriate decision-making processes can be complex and vary based on multiple criteria suc has tenure, performance, company’s context.

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Let’s explore here several ways your company can use to structure increase decisions that takes into account pay equity and budgets.

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Prerequisites

Before knowing how to drive increase decisions, it’s always good to review your current compensation practices and how consistently are they applied within the company.

Having compensation ranges that match with your career growth philosophy will help tremendously in providing a good base framework to link these decisions.

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Merit Matrix

For companies that have merit processes, choosing a way to do it can be tricky. Some may recommend a flat % of increase across the board, others may tie it to performance ratings or internal equity.

If your objective is to reward employees based on performance, but are considering any inequities coming from similar job peer groups, using a merit matrix can be a good practice.

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Factors

Usually, this matrix takes 2 factors:

• Performance ratings (or equivalent grading used by your company).
• Internal equity translated either by the the compa-ratio (current salary divided by the range midpoint) or the range tier positioning (ex: below range, within range, above range).

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Example

Using the compa-ratio or the internal range positioning allows to set a clear objective on what the company expects employees to be paid at.

This matrix will drive people that are meeting expectations towards the midpoint of their range, whereas those that are below expectations will not move and it allows to reward outstanding performance with better increases (or be eligible to move to the next level).

In this example, several key considerations are taken into account:

• People below range should get to the minimum of the range and get larger increases when they perform, as they are paid closer to the minimum of the range.
• People with strongest performance are being rewarded with largest increases.
• People with performance rated below do not get any increases
• People above range do not get any increases, as there are other mechanisms in place to reward the most performing ones (i.e. promotion).

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To tweak the % of increases, you can select the target internal positioning (or compa ratio) for each combinaison of performance/internal equity and then, determine when this target adjustment should happen (within 1, 2 or 3 comp cycles). For instance, if one’s company objective is to move every person that are consistently meeting expectations towards the midpoint of their range (compa-ratio at 1.0) in the course of 2 comp cycles, the target internal equity will be spread between 2 cycles with a different merit matrix.

With these types of recommendations, it will help correct potential gaps linked with initial offer and other bias criteria over time.

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Promotions

Promoting one person from their current level to the next one is a great reward tool to recognize their performance and increased scope of work, beyond providing a clear sense of career growth within the company.

Defining the recommendations based on promotion may vary from company to company:

• Based on your compensation philosophy, you may define criteria where promoting someone to the next level is eligible to an increase
• If the promotion case is eligible to an increase, you can define as a basis that people will move to the minimum of the next level pay range.
• Based on your philosophy, you can also add a threshold of minimum increase % linked to a promotion (i.e. recommend a minimum increase of 5% if the move to the minimum of next level range grants a lower increase), and add a maximum as well.

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Considering these items will help managers to get a clear view on how to manage increase decisions accordingly.

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Other cases of increase

Performance and internal equity are not the only factors when structuring your cycle. You may often consider special cases or cost of living adjustments on a location-by-location basis. These adjustments can be done either outside or within the compensation review cycle.

If these are done during the review process, flagging these types of increases remain useful as a way to allocate a specific budget and sets of recommendations to your managers.

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Checks and control

When planning for a compensation review, several controls can help safeguard consistent decision-making process and where our compensation tool can support. Some of them may be are built in your eligibility criteria:

• People below range after an increase
• People above people
• People that received an out-of-cycle increase within the past X months
• People without increase for the past X months
• People where increases are outside your company’s recommendations
• People ineligible to a budget, but got an increase
• People where potential gender pay gap is identified within their peer group

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Communication after end of cycle

Structuring your compensation review is also about creating the best conditions to share your compensation philosophy and train managers to talk about these topics, especially when communicating the results of the cycle.

In addition, providing visual reward letters to employees can further enhance recognition and show how invested is your company on this topic.

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Structuring efficient compensation cycles

Establishing structured compensation increases and controls in your compensation cycle is one of the keys to ensure employee satisfaction and retention. Using these tools can support companies to ensure consistency and equity in their process, along with monitoring their budget.

Compiling these processes manually can be time consuming and bias can creep in. Instead, unify your compensation processes with a compensation platform that safeguard accurate decisions and help managers navigate rewards discussions.

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