Compensation Budgeting How-To: Start With Design and Data

October 18, 2017

This is an excerpt from our budgeting how-to whitepaper. Download the full version here.

Money is an uncomfortable subject to talk about, even in business. Still, it’s a necessary part of developing and maintaining a loyal workforce, making compensation budgeting one of the most important functions of finance and HR. Explaining to leaders that well-paid employees can produce more profits, while focusing on reducing turnover rates, eliminating pay equity gaps and determining raises can be difficult though. So before you request more money from leadership for your compensation budget, it’s smart to sit down and get planning.

Before you request more money from leadership for your comp budget, sit down and get planning.

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Start With Design

Comp designs are made up of four critical elements:

Compensation philosophy, which provides a high-level view of the aims of the organization with regard to compensation
Compensation strategy, which focuses on how your organization intends to accomplish the philosophy. In particular, it outlines the talent markets and level of competitiveness to those markets, and it answers the question “What do you want to reward?”
Compensation structure, which provides a mathematically sound way of aligning your positions to market and internally as well. A compensation structure is typically made up of grades and ranges, and organized into multiple schedules in larger organizations
Compensation policy, which ensures the compensation plan is carried out

To determine if you’re paying fairly to market, you’ll need to choose your compensation strategy, including your competitive talent market and your target market percentile. Competitive pay strategies have a high impact on attraction and retention of top talent.

The other consideration in choosing your strategy has to do with what you can afford to pay for top talent. The strategy you choose will depend on what you’re trying to accomplish as an organization. Some may target the 40th percentile because they can’t afford more, yet if they are a highly value-driven organization with a big social impact, employees may be encouraged to stay for reasons other than compensation. On the other hand, some go-getter organizations may target the 90th percentile!

Now Add Data

With your compensation strategy and overall budgetary considerations in check, you’ll apply your compensation strategy to solid market data. In order to do so you’ll need to account for three things:

Price to the job, not the employee. By pricing your jobs, you are pricing according to your strategy, which in turn enables you to compensate, recruit and attract employees at the right level for your organization. Managers tend to want the most skills possible for any position, but it may be that your company only needs a moderate skill level for the vast majority of your positions. Pricing by the job requirements will identify the midpoints of your ranges; employee skill sets and experience determine position within the range.
Know your jobs. Another thing to keep in mind in getting reliable market data is to appropriately benchmark your jobs. This means a need to know your positions. Go beyond just title matches to matching the key responsibilities and tasks for your benchmark jobs. What are the top three functions? What kind of decision-making authority will specific roles have? What typical tenures do you seek for your roles? Are there required degrees or certifications and if so, how do you plan to reward education?
Use reliable sources of data. There are three main ways of obtaining market data: a) traditional surveys, b) online data and software and c) custom surveys. Be sure to check the credibility of your source, consider the methodology used, see that it covers your appropriate competitive set, ensure that it fits your budget and finally, use real-time and accurate data

Learn More About Our Compensation Software

Once you have a clear sense of your compensation design, you’ll need to begin your budget planning by identifying compensation inequities … which is what tomorrow’s blog is all about. Stay tuned!

Want all the steps and details for the full budgeting process now? Grab our budgeting whitepaper today!