The war for talent is intense. Compensation and benefits (“total rewards”) is supposed to be a simple formula for building and retaining talent.
Without a well-structured plan for compensation reviews, it’s hard for companies to keep up with the ever-evolving landscape. Not only do companies need to be more proactive about paying their employees competitively against the market, they also need to be more vigilant, open and transparent.
1. Be Realistic About Budget
Too often, the budget is established and devised in isolation. While developing the budget, market survey data should be factored in to help establish budgets for the local salary increases.
Determining how much salaries will inch upwards varies based on the country(ies) that you have employees in. For example, in China, typical merit salary increases are about 8%, and in Argentina, 30%.
Don’t forget about employees getting promotions too! A typical promotion increase for a U.S. based employee is about 10%. And typical promotion increase percentages also vary by country (i.e., in China, it’s 20% to 25%). Factor in at least an additional 1% of payroll (on top of merit increases budget) to account for your promotions and sanity check it against what percentage of your workforce got promoted last year. If you have a large population of your workforce below market, add more to your budget.
Too often, compensation budgets are developed based on existing employees current salaries. This can result in the company not being able to pay for the talent they want to attract. You’ll also need to factor in premiums for skill sets that are hard to find in the market (e.g., Machine Learning Engineers)!
If you don’t budget in a realistic way, salary increases that aren’t competitive might have the opposite effect to what you expect: instead of employees being happy about a pay increase and feeling recognized, they feel insulted and walk out. Losing top talent results in the company losing valuable time and money.
Don’t forget to properly budget at least each year for equity too (if it’s offered at your company). Companies need to realistically budget equity for new hires, refresh or annual grant cycles, promotion grants, and any other unique circumstances (e.g., executives hires, M&As, etc.).
2. Proactive Compensation Reviews
Proactive compensation reviews mean that you proactively celebrate your talent and their contributions. One way to do that is to have a regular compensation review cycle.
Many organizations establish an annual compensation review cycle, while others find more frequent cycles (e.g., semi-annually, quarterly) to be more effective. There are pros and cons to the different frequencies.
For example, semi-annual or annual cycles might allow for more effective calibration and enhanced ability to provide differentiation of pay based on performance.
Compensation reviews are about determining where your employees fit compared to the external market, internal fairness amongst their peers, and retaining your valuable talent. Pretty substantial! So be sure to be proactive about periodic compensation reviews.
3. Transparency & Communication
Transparency is not just another buzzword. It also doesn’t mean share salary ranges with the entire organization!
Transparency is a commitment to equal pay for equal work that aims to earn the trust in fairness. Opening up the compensation program information is a start, but benefits of such transparency are realized only if they’re communicated well.
Communicate the timeline and frequency of your compensation reviews and articulate your total rewards philosophy. Communicate your compensation programs and processes to your leaders so they can make their pay decisions effectively. Provide various data points, like market compensation data, pay history, date of hire, etc. to help with their decision.
Create and share example talking points for managers to use with their employees.
4. Celebrate & Recognize
Companies tend to create goal-post after goal-post but remember to pause and celebrate employees’ contributions too!
Employee morale and loyalty simply cannot be bought - but celebrating a successful year with your employees and recognizing their efforts can go a long way. Provide them with a memo that communicates their increase and a job well done! Don’t forget to recognize promotions.
Throughout your communications, keep in mind cultural differences too. For example, if your company has a global presence, typical increase percentages are sometimes different in U.S. vs. other countries. Also, employees in some countries do not prefer direct attention; leaders may want to announce promotions in one-on-one or team meetings vs. an all-hands meeting.