Structuring compensation increase recommendations

Comp Cycles
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You are about to launch a compensation review cycle, but somehow, you wonder if you have put the right structure to guide your managers in their increase decisions?

The right balance between no structure and complex one is hard to find when it comes to increase recommandations, but it is essential to avoid inequities as well as staying flexible. Thus, having a framework is a great way to scale your compensation practices without the need for a manager to be a comp guru.

By the end of this article, you will be able to understand several types of recommendation logics and situations where we tend to see them applied.

Types of increase recommendations

When it comes to increase recommendations and matrix, a few trends are commonly encountered:

  1. The flat % of increase
  2. The performance increase matrix
  3. The performance + range position matrix

The flat % of increase

In this scenario, every employee gets the same increase recommendation % and it serves as well as a budget reference for managers. Managers are given discretionary decisions as long as the total budget is respected. For instance, the general recommendation is 5% for everyone.

  • Easy to explain and straightforward to manage.
  • Empowers managers to provide their input for increase decisions.

  • Fewer controls towards inequities given performance is detached from compensation increase.
  • Managers should be trained to have a strong understanding of compensation.
  • Main control is leadership and HR teams reviewing and approving every input.

This methodology is chosen when companies are looking to empower managers while seeking an easy way to administer compensation decisions.

In this case, managers have most of the information about an employee’s performance and is given flexibility to spread increases or only give better increases to top talents.

The performance increase matrix

In this scenario, employee’s performance is linked to compensation increases and the HR team provides a set of recommendations to guide managers.

  • Flat % for each performance score: if someone is given a score of 3/5, the HR team recommends a 3% increase.
  • Range of % for each performance score: if someone is given a score of 3/5, the HR team recommends between 3% to 5% increase.

  • Compensation increases are linked to performance.
  • Managers have some flexibility for increases outside of performance scores.
  • More control on your compensation structure.

  • For HR teams, more time allocated to manage this matrix and make it easy to read for managers (several if-scenarios).
  • Outside increase decisions still happen in a few situations.

The performance increase matrix is a good base to kick-off a compensation structure and provides good balance between first recommendations and manager’s flexibility.

Performance-based recommendations: You can define performance metrics and simply link it to recommendation increases.

The performance + range position matrix

In this scenario, compensation increases are linked to performance score and compensation ratio (i.e. position within the company’s compensation range).

For each sets of locations, each combinaison of performance score and position within the ranges triggers a different increase recommendation:

  • If an employee has a performance score of 3/5, someone below the midpoint range may be recommended a 5% increase whereas someone above the midpoint range may be recommended a 3% increase.
  • Likewise, these increase recommendations may differ from one location to another.

Some recommendations increase can also suggest to adjust people not in percentage of increase, but based on their compensation range:

  • If an employee has a performance score of 3/5, someone outside of the range may be recommended to get within the minimum range.

  • Great control over inequities within roles and allows employees with comparable performance to be within the same position in the band.
  • Very practical to quickly identify people outside of ranges and track out-of-recommendation decisions.
  • Managers have some flexibility for increases outside of performance scores.

  • Compensation increases is not strictly tied to performance, as market / ranges factors are also main adjustments criteria for decisions.
  • Requires effort and time to onboard managers with this philosophy with more complex calculations to administer for HR teams.
  • Explaining increases to employees may be harder as it comes with different factors.

This philosophy is great when teams want to reduce the risk of employees with similar roles having large pay gaps, while taking into account both performance and compensation ranges.

Make sure to understand the time to onboard your organisation and trade-offs with this data-driven approach!

Other recommendations

Other variables may also be taken into account for increase recommendations:

  • Promotion : provide a recommendation if an employee is promoted to a next level.
  • Seniority: for newcomers, define a general recommendation if an increase is applicable.

Based on the recommendation philosophy you select, these recommendation may include performance and/or compensation ranges factors.

In any case, be sure to communicate the rationale and ensure it is explainable.

In a nutshell

Though it is standardized, compensation philosophy and recommendation rationale vary from one company to another as it could make compensation a great competitive advantage.

But most important, your compensation recommendations should reflect your organisation and your culture:

  • How flexible do you want your managers to decide on compensation increases?
  • Do you want to limit greater gaps within the same role / job group?
  • How far do you want performance / compensation ranges to drive increases?

Your company context matters, independently of what other companies are doing. The right question to ask is more what people you would like to attract/retain and how involved you want your managers to be in compensation cycles.

Qommet Makes Compensation Much Easier

Compensation processes shouldn’t take up all of your time and effort. This is why our mission is to provide flexibility as your organisation needs to and accommodate these philosophies in our compensation tool.

Avoid spreadsheets and centralise everything in one place. Contact us to see how our platform can work for you.