Compensation Program Budgets Don't Allow for Big Increases In Salary

by on June 11, 2009 · 0 Comment POSTED IN: HR Info Center

A Compensation Program Supports 0-5% Pay Increase

Budgets aren’t all that easy to administer. For the last five years, the national average for budgets for a compensation program has been about 3%.

If a company’s compensation program has a 3% budget that means you have to average 3% increase for everybody. You take payroll times 3% and that’s your pie, and then you look at everybody out there and say, “How do we pass it out?”

But does that mean everybody gets a 3% increase just because the compensation program budget is 3%? No, not necessarily. You could give individuals more. You don’t have to divide the pie up exactly even just because it was created on an even basis.

But let’s get real. And if you’re in the fortunate crowd and you have a 3% budget, how big can anybody’s personal increase be if the average budget is 3%?

Could you give an individual 14% in a 3% budget? No, you can’t. HR makes up rules preventing that kind of thing. Think of them as hog laws. Hog laws are rules that say one little piggy shouldn’t get all the slop.

And so, people invent rules that say, zero to five in a 3% budget. This is because if you give somebody five, you have to give someone else with the exact same starting salary one. That’s not fun. Nobody wants to do that. And so, zero to five seems to be the dominant mode for a 3% budget.

Think about this for a second. If your compensation program gives somebody a 5% increase in pay in these times where the cost of getting back and forth to work and everything else, do you think they’re going to stand up on the table and go, “Woo-hoo! Ya ha! Finally! Yeah!” Not likely.

On the other hand, you don’t even get to give out many fives, you have to give a one for every five. So that’s the best you can do. And if the best you can do is 5%, the average would have to be 3%.

You give out a lot of twos and threes and fours for every five. So the interesting part of this whole thing is if you’re trying to tell somebody you pay for performance, ultimately the punch line at the end of the joke is not very funny. Five percent is not very funny. And most of the time that’s the best you can do with your compensation program.

Edited Remarks from “How to Drain the Drama from Salary Reviews: A Conversation Roadmap” by Gary Markle

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