Could a Budget Growth Compensation Plan Solve Your Budget Issues?

If you’re like most of the organizations in the DC area, your compensation program offers employees a traditional 2-4% yearly raise. And according to World at Work and Mercer, you’re right on track with the rest of the companies in the United States that offer a 2.8 to 3.0% average annual salary increase. But have you ever stopped to wonder if this classic compensation plan is actually the best way for your organization to find and retain the most talented employees? Or if an entirely different kind of compensation plan might be better suited to achieve the most effective balance between performance and compensation?

While the majority of organizations default to a salary based compensation plan of yearly incremental salary changes, many companies see better results from growth based compensation models that shift salaries up or down according to each year's revenues. And the only way to know which plan will help your company achieve its business objectives is to dig into the data.

Don’t Stop With the Easy Choice

Yes, it’s easy to adopt a standard cost-of-living increase that treats everyone within your company the same. It allows your company to estimate salary costs over the long term, and it avoids internal arguments about fairness or bias within the compensation structure. However, it also sends a message to your high performers that no matter how hard they work or how well the company does, they’ve just about hit the glass ceiling on how high their salary will climb.

Budget growth compensation plans, on the other hand, tie yearly salaries to the performance of the company. When the company does well, your employees are rewarded with a higher salary and motivated to stay with your company and keep working hard. And when the company doesn’t do well, your organization isn’t stuck with the bill or scrambling to cover payroll with limited funds. 

Budget growth compensation has its cons, of course. It requires HR teams to invest more time in planning and balancing compensation, benefits, promotions, attrition, and other changes before setting a year’s salary budget. But for many companies, the benefits outweigh the downsides.

Which Model Will Work for You?

When should your organization consider budget growth? When you’re looking to build a competitive advantage without increasing your salary budget. Particularly in the DC area, growth based compensation models can help you attract employees who are entertaining other competitive salary offers. That’s part of the reason employers like to see what others are doing in terms of compensation with resources like the HRA-NCA Compensation Survey Report, Benefits Survey Report and Salary Planning Survey Report. These resources allow employers to look up individual positions and corresponding market rates and make decisions accordingly, and it may help you realize that sometimes a 3% bump simply isn’t enough to keep prospective employees interested in your offer.

Budget growth compensation plans can also help you pinpoint the best salary ranges for different positions. When you assign a new salary, you can see where the position falls in your current range and how fast it is progressing toward the market rate as it rises and falls with company revenue. You can also offer positions to younger employees as an opportunity to get up to a market rate faster than a traditional salary growth compensation plan.

For example, let’s look at how the federal government approaches compensation. The government segments its employees into general schedule pay grades like GS-1 through GS-15. For promotions, employees step up on the scale. For cost-of-living increases, they receive a basic 1.3% raise each year, if at all.

This general schedule method works for the government because they are able to calculate and forecast revenues for up to 10 years in advance: having a forecast for revenue helps determine how high the salary budget can grow; knowing the growth of the salary budget helps enable HR personnel with deciding where the money is best spent; and the promotion from one step to another allows the government to distinguish star performers from average employees and reward them with competitive wages.

But what if you don’t know what your revenue and your budget will look like in 5 years?  A small non-profit organization can’t predict its revenue growth because it is dependent on the 2-5 year grant cycle, the success of its fundraising, and the growth of its donor base. Because the general schedule method wouldn’t work for this organization, they would be well-served to look into growth scale or incentive-based salaries that incentivize each worker.

When it comes to deciding on a compensation plan for an organization, there’s no universal right or wrong answer. It’s up to your leadership team to work through the process and determine whether a salary growth model or a budget growth model will be most effective for your company, your goals, and your employees. It’s vital that you evaluate the pros and cons of both models and decide on the one that aligns with your goals rather than simply adopting a business-as-usual approach to the yearly raise.

If you decide a budget growth compensation model might be best for your company, don’t miss the second article in the series about how to make the switch.

Does your company compensate based on salary growth or budget growth? What factors did your company consider in order to make that decision, and what’s been the most significant benefit so far?

About the authors:

Daniel Hernandez, CCP, SPHR, SHRM-SCP- Mr. Hernandez has over 20 years of human resources experience in compensation, benefits, performance management, and policy development.  He has been working with the District of Columbia for the last 10 years and is now the Director of Special Benefit Projects for the District of Columbia Retirement Board. Previously, Mr. Hernandez was the Associated Director of Compensation and Classification Administration in the Department of Human Resource where his responsibilities included the design and implementation of multiple compensation systems, implementation of merit pay, and redesign of the performance management program for over 20,000 employees. In his professional experience, Mr. Hernandez has worked in the non-profit and private sectors in all areas of human resources. He was Senior Researcher at the International City/County Management Association’s (ICMA) Center for Performance Measurement in 2001-2004 and Sr. Consultant designing compensation and classification plans for public sector entities at DMG-Maximus (1995-2000), where he designed compensation plans for over 50 clients. Currently, Mr. Hernandez also currently provides compensation and other human resources services as a contractor.

Mr. Hernandez obtained a Master of Public Administration (MPA), with the specialization in City Management/Fiscal Administration from Northern Illinois University in December 1994. Mr. Hernandez has obtained a certification title of Senior Professional Human Resources SPHR from the Society for Human Resource Management and is a Certified Compensation Professional (CCP) from World at Work. His work has been recognized locally through awards from the Human Resource Association of National Capitol Area in 2007 for Workforce Development and again in 2008, from the Local Governmental Personnel Association of the Washington-Baltimore Area, where Mr. Hernandez was awarded the Jack Foster Personnel Executive of the Year.

Maria Gupta is resident marketer for HRA-NCA and their survey products.  Touring local HR groups in the DC metropolitan region provides her with the pulse of what is current water-cooler talk within the HR community.  By day, she provides marketing expertise as Director of Marketing at AKRON Inc, the administrators of the HRA-NCA surveys.

Sarah Greesonbach is an HR data and technology writer in Richmond, VA. Her articles and reports tackle the latest research, trends, and insights in hiring, recruiting, and HR.