2015 Compensation Budgets—Are You Prepared?

2015 is nearly upon us, and for most companies that means reviewing their compensation budgets. Where to start? At the very beginning, says consultant J. Timothy O’Rourke. Understand the organization’s strategic needs, and know your market’s benchmarks.

O’Rourke, who is the current chairman, president, and CEO of Matthews, Young—Management Consulting, shared tips on budgeting compensation for the new year in a recent webinar presented by BLR® and HR Hero®.

The first question you should ask, says O’Rourke, is what the organization’s compensation philosophy and market pricing strategy are? They are intertwined, and they depend on the company’s situation. For example, if your organization is the biggest employer in a region with a good working environment, the philosophy may be conservative and compensation may be a bit below market benchmarks. However, a new start-up may opt to pay above benchmarks to attract the right recruits and grow quickly. Know your strategy before you plan.

Meet in the Middle

While compensation can take a variety of forms (benefits, perquisites, bonuses, incentives), base salary is the greatest factor in attracting and retaining employees, says O’Rourke. There are two ways to view your salary budgeting:

1. From the bottom up. This is what would be ideal. Keep every employee up with the market, and move high performers up to another level relative to the market.
2. From the top down. This is what is realistic or affordable—and what management tends to be focused on. If dollars are sparse, decide who should get them, and what, if anything, can be done for the others on the staff.

O’Rourke recommends simultaneous bottom up and top down approaches. Look at market benchmarks to see exactly what your employees might expect, and then temper that with what your organization can realistically spend.

Try BLR’s all-in-one compensation website, Compensation.BLR.com®, and get a complimentary special report, Top 100 FLSA Overtime Q&As, no matter what you decide.   Find out more.

2015 Numbers

O’Rourke’s research indicates that the projected market movement across industries for 2015 is an increase of 2%. This is the foundation piece for salary budgeting in the coming year. However, some surveys indicate that many businesses are projecting an average salary budget increase of 3% in 2015.

Therefore, assuming that you are currently paying salaries at market on average:

• Base salary increases across the board of 2% in 2015 will keep everyone in your company where they are relative to the market.
• Many competing organizations will afford a 3% increase—moving their employees 1% better than the market.

The problem for many, says O’Rourke, is that a lot of organizations are now paying many employees below market and/or can’t afford a 3% increase in fixed cost. To further complicate matters, you must keep in mind that to retain high performers, they may require more than just a raise that’s in line with the cost of labor.

Try BLR’s all-in-one compensation website, Compensation.BLR.com®, and get a complimentary special report, Top 100 FLSA Overtime Q&As, no matter what you decide.   Find out more.

Keep Your Superstars

If you’re currently compensating below market benchmarks and the outlook for 2015 is uncertain, you still need to retain your best talent. O’Rourke suggests sorting the staff into three roughly equal-sized groups:

• “Superstars.” Naturally, these are your very best performers.
• “Steady Eddies.” This actually may be closer to two-thirds of your workforce, says O’Rourke.
• “Needy Sleepys.” These employees may make up far less than one-third of the staff—they don’t stay very long, probably because they merit few rewards.

Be sure to discriminate only on performance, says O’Rourke—not only is it by far the most important measure, but it’s the only legal one, too!

Once the staff is sorted, hold onto that one-third who are superstars. Even in tight times, look at some simple math:

• A 3% raise times 1/3 of the staff is a mere 1% increase in spending.
• A 5% salary increase times 1/3 of employees is an overall increase of 1.65%.
• Even looping in the steady eddies could be feasible—4% for superstars and 2% for steady eddies equals only 1.98% in new spending.

The point is, whatever is affordable, make sure the superstars get the bulk of it, says O’Rourke.

In tomorrow’s Advisor, O’Rourke elaborates on how to work with a small (or nonexistent) 2015 compensation budget, plus we introduce the all-things-compensation-in-one-place website, Compensation.BLR.com®.