4 Tips for Switching to a Budget Growth Compensation Plan

The majority of organizations in the DC area default to a salary based compensation plan of yearly incremental salary changes. While this is a very common practice (after all, according to World at Work and Mercer, the majority of companies in the United States that offer a 2.8 to 3.0% average annual salary increase), it’s not always the best practice. That’s why many companies are switching from a salary growth compensation model to a budget growth one.

As we discussed in our introductory article on budget growth compensation models, deciding between a salary growth or budget growth compensation plan ultimately depends on the specifics of your organization. The more stable your income or funding, the more sense it makes to stick with a salary growth compensation plan. The less stable your income (for better or worse), the more your leadership team and employees might benefit from a growth based compensation plan.

If you’ve determined that a growth based compensation model might work for your organization, here are four tips to help you make a smooth transition:

1. Don’t slash salaries.

While this rarely happens in the DC area, when organizational revenues decrease, companies in other parts of the country often accommodate the change by shrinking budgets. And since human capital costs average nearly 70% of operating expenses across the majority of organizations, salaries are often on the first list of things to cut followed closely by limiting raises and replacing high-cost employees with individuals with less experience.

While sometimes necessary, cutting the pay rate should be a last resort. It significantly impacts employee morale, lowers overall performance, and can lead to even more damage to the bottom line. It’s also not a long-term solution that will solve the underlying problem of poor revenue.

2. Plot salaries with a trend analysis.

Use a trend analysis to plot where your organization’s budget has been for the past few years and where it is headed over the next few years. Have salaries increased the overall budget? And how have they affected overall revenues?  Plotting this data will allow you to do some predictive analysis, forecasting the growth in salaries, retirement, retention, attrition, and hiring over the next four or five years.

3. Develop a compensation philosophy.

If your organization hasn’t already developed a compensation philosophy, it’s time to do so. After all, if your leadership team doesn’t have an idea of what your organization wants to achieve or whether you want to lead or lag the market, you won’t be able to make consistent decisions about what you can afford.

For example, for a competitive advantage, your organization should consider using the budget growth over salary budget method for determining compensation rates, despite the work that goes into the process.  Or you might find that the budget growth method isn’t the best method for your organization because it doesn’t align with your compensation philosophy.

4. Get buy-in from management.

Getting buy-in from management is a critical step on the path of switching to a growth model, and the only way to achieve it is by providing data that allows your leadership team to make an informed decision.  Armed with your past expenditures and forecasted budget analysis, you’ll be able to provide the context for a productive discussion and decision.

Like any significant change to a company’s organizational structure, switching to a budget growth model will inspire some pushback and some doubts. However, companies that plan ahead, define their goals clearly, and get as much buy-in as possible from management and employees will soon find that the benefits outweigh the growing pains.

Have you made the switch from a salary growth model to a budget growth model? What’s been the biggest benefit so far?