Budgeting for Pay Increases and Structure Adjustments

By Joy Lynn Hyer, SPHR, SHRM-SCP, CCP, Senior Compensation/Survey Analyst
Published May 14, 2024

Q: How do I explain to our executives and board members that we need to account for salary structure adjustments in addition to individual pay increases when we are budgeting?

Managing your salary budget requires three steps. 

First, your pay ranges need to be adjusted annually to stay current with the labor market. This process, also called competitive positioning, maintains the competitiveness of your pay structure. When executing annual pay range adjustments, it is important to note that leading practices focus on using the year-over-year change in the cost of labor, not the change in the cost of living, when updating pay ranges. 

Second, once an annual pay range adjustment has been executed, it’s important to review individual employee pay rates to ensure all employees are being paid within their respective pay range. If an employee falls below the minimum of their range, a market adjustment should be issued to ensure that each employee is being paid within their competitive pay range.

Third, you must budget for your annual pay increases. Whether your organization provides general pay increases, cost-of-living adjustments, step increases, or performance-based merit increases, the organization must budget appropriately. Employee pay adjustments must be monitored to ensure they remain aligned with their pay range. An increase too large may drive an employee’s pay beyond the maximum of their range, or if an employee’s pay is not adjusted, they could fall out of the bottom of their pay range.

Under normal circumstances, when an employee receives a pay increase that is larger than the annual pay range adjustment, the employee will gain range penetration and move upwards within their pay range. If an employee’s pay increase is lower than the annual pay range adjustment, the employee will lose range penetration.

Remember, your compensation system is a moving target and annual structure adjustments are a recommended pay practice for the years in between formally benchmarking your jobs. It is recommended that all jobs be benchmarked to the market every three to four years. 

Members of HR Source will find our annual structure/pay range adjustment recommendations in an annual newsletter article each fall. Of course, you’re always welcome to reach out to the HR Hotline Online or at 800-448-4584 with questions.

How are your annual pay increases determined and who’s involved in the decision? Enquiring minds (in the All Members Community) want to know!