Salary increases are key to any company’s employee compensation management strategy—they impact morale, retention and overall organizational performance. But to achieve the biggest return on your increases, companies must carefully determine salary increase budgets and provide clear guidance to managers on how to allocate them fairly. Here’s how to get both sides of that equation right.

How to Determine Salary Increase Budgets

1. Analyze organizational financial health
   Before setting a salary increase budget, the company must assess its financial health. This involves reviewing current revenue, profit margins and cash flow. Ask yourself key questions, such as:
   • What’s our current financial position?
   • Are we in a growth phase, facing financial challenges or maintaining steady performance?
   • What’s our financial forecast, and what projected financial trends may affect us?

Forecasting future revenues and costs can guide decisions about how much to set aside for salary increases.

2. Evaluate industry benchmarks
   It’s essential to remain competitive if you want to keep and grow existing talent. Research industry salary surveys and reports to understand how your salary increase budgets align with market norms. Benchmarking helps ensure that salary increases are fair and competitive within your industry.
3. Consider employee performance and contributions
   Adjust your salary increase budget based on employee performance and contributions. High performers who exceed expectations might justify a higher budget allocation compared to average performers. Evaluate the impact of each employee’s performance on the company’s success to determine appropriate increases.
4. Review historical data and trends
   Analyzing past salary increases and their impact can provide insights into what might work well. Look at historical trends regarding how salary increases have affected employee satisfaction, retention and performance. This data can help in setting a realistic and effective budget.
5. Align with strategic goals
   Salary increases are an important lever in helping achieve larger goals. If your company is focusing on innovation, for example, investing in high-performing employees who drive innovation might warrant a larger budget for salary increases.
6. Address economic factors
   External economic factors such as inflation rates and cost of living adjustments should also be part of your planning. These factors will influence employees’ purchasing power and morale, so incorporating them into your budget planning will help ensure that salary increases are meaningful and fair.

Guiding Managers Toward Fair Salary Increase Distributions

Once the salary increase budgets are determined, it’s crucial to guide managers on how to distribute these increases effectively.

1. Establish clear criteria
   Provide managers with clear criteria for distributing salary increases. These criteria should be based on performance, contributions, market rates and individual roles. Communicate these criteria transparently to ensure that managers understand the rationale behind salary increases and can apply them consistently.
2. Provide manager training
   Equip managers with the skills and knowledge needed to make informed, equitable decisions about salary increases. Offer training on performance evaluation, unbiased decision-making and effective communication. Managers who are well-trained in these areas are better positioned to distribute salary increases fairly and effectively.
3. Use a performance-based approach
   A performance-based approach helps ensure that increases are tied to individual contributions. Managers should assess employees based on predefined performance metrics and outcomes. Performance reviews should be conducted regularly and feedback should be used to inform decisions about salary increases.
4. Consider employee development and potential
   In addition to current performance, managers should consider employees’ potential for growth and development. Investing in employees who show promise for future leadership roles or significant contributions can be beneficial. Managers should balance rewarding current performance with recognizing potential.
5. Ensure equity and fairness
   Salary increases should be equitable across similar roles and performance levels. Managers should avoid biases related to personal relationships or other non-performance-based factors. Implement checks and balances, such as cross-departmental reviews, to ensure fairness.
6. Require clear communication
   Clear communication is essential in the salary increase process. Managers should provide employees with detailed feedback about their performance and the rationale behind their salary increases. Transparent communication helps employees understand how their performance impacts their compensation and fosters trust in the process.
7. Offer development opportunities
   In addition to salary increases, consider offering development opportunities as part of employee compensation packages. Training, mentoring and career advancement opportunities can complement salary increases and help employees feel valued and invested in their roles.
8. Leverage technology
   Utilize technology, such as a compensation management system, to streamline the process of determining and distributing salary increases. These systems can help track performance metrics, budget allocations and historical data, making it easier to manage and distribute salary increases consistently.
9. Monitor and adjust
   Regularly monitor the impact of salary increases on employee morale, retention and overall organizational performance. Gather feedback from employees and managers to assess whether the increases are achieving the desired outcomes. Adjust future salary increase budgets and distribution strategies based on this feedback.

Best-of-Breed Is Simply Best

Employee compensation is your company’s single largest expense.

Getting compensation wrong is not an option, so relying on error-prone spreadsheets and unsecure email chains won’t do. Chances are, the compensation solution included with your HRIS will only get you part of the way. Instead, a purpose-built solution such as TalentComp  will give you the visibility and insights you need to ensure equity and effectiveness across the board.

With TalentComp, you can create budgets that precisely match even the most complex needs and criteria. You can automate your guidance matrix to ensure that managers adhere to performance-based approaches and equitable practices so that salary increases are distributed fairly and in alignment with organizational goals.

Once decisions are made, TalentComp assures clear employee communications through easy-to-configure, easy-to-generate compensation statements. Reach out to CWS Software to see how the TalentComp compensation management system can ensure that your salary increase practices contribute positively to employee satisfaction, retention, and overall organizational success.