It’s HR’s favorite time of the compensation cycle when organizations begin thinking about their salary budgets for the coming year. This year’s planning will take into account the recent release of the new Fair Labor Standards Act (FLSA) overtime rule and, in some states, new or upcoming changes to the minimum wage. Between compliance with federal/state regulations and ensuring that annual compensation planning processes run smoothly, to say HR has a lot on its plate is an understatement.
Because organizations must take so much into consideration this year, it is helpful to step back and focus on the following key questions:
- What does salary compensation budget cover? Are all forms of adjustments included in this pool or just a subset, such as merit, cost-of-living adjustment (COLA), market adjustment, internal equity, promotion, and reclassification?
- How are you addressing the new FLSA overtime rule, and what is the impact of any resulting classification changes?
- How are you addressing minimum wage changes and their impact on internal equity and salary compression?
- What steps are you taking to communicate compensation changes (regulatory or standard process) to your employees?
- How are other organizations creatively managing a limited salary budget to reward their employees?
Where Are Salary Budgets Headed?
Sibson Consulting’s 2020 Salary Planning Analysis found that salary budget and structure increases have remained flat across employee groups (executives, exempt, and nonexempt) at 3% (budget increases) and 2% (structure increases). There appears to be minimal variance to these percentages by industry. At a time when investments in employees are so crucial to the sustainability and growth of organizations, HR leaders are trying their best to marry their compensation and benefits programs to provide employees with a cohesive and competitive total compensation package.
Meeting This Year’s Planning Challenges
HR professionals are collaborating with their senior leaders to determine what to include in the salary budget and what needs to be funded through a separate pool(s). Increasingly, we are seeing organizations using a separate pool to address promotion and equity adjustments rather than combining into one overall pool with merit and COLA. Organizations are also setting aside separate funds to address regulatory changes, such as the FLSA salary threshold increase to $35,568 and increases to the minimum wage.
An important first step to being fully prepared is to conduct an impact analysis of the final overtime rule and changes to the minimum wage to your organization. This includes a review of the current salary structure ranges and an analysis of internal equity and potential salary compression. More broadly, this is the perfect time for organizations to conduct a comprehensive review of their compensation program: understanding the competitiveness of pay, what rewards employees value most, and the identification of any gaps between the market and employee values to the current offerings. As salary budgets remain flat, organizations may consider other forms of variable awards to reward performance, such as bonuses/incentives, spot/recognition awards, and intangible items that promote engagement and support the organization’s culture and brand.
There are many challenges for HR professionals as we begin to look at these new changes and develop an implementation plan. So welcome to fall budgeting and planning—let the juggling begin!
As consultants in Sibson’s Performance and Rewards Practice, the authors work with employers to improve their compensation and performance management through assessments of current programs and innovative designs of new programs.
Carolyn Cowper is a Vice President with Sibson Consulting. She coleads Sibson’s Market Assessment and Salary Structure Design offering and has over 15 years of experience in human capital consulting, with a focus on compensation and performance management assessment and design for corporate and nonprofit organizations.
Katie Manning is a Senior Consultant with Sibson Consulting and coleads Sibson’s Market Assessment and Salary Structure Design offering. She has over 20 years of global executive and broad-based compensation experience within consulting and general industry, assisting clients with setting compensation strategy, the design and implementation of compensation plans, compensation administration process design and optimization, and the design and implementation of career frameworks.
Andrea Averill is a Senior Consultant with Sibson Consulting and coleads Sibson’s annual salary planning analysis and newsletter. She has over 20 years of experience in human capital consulting, working with organizations on their human capital strategies, with expertise in compensation design and performance management. Averill serves as Sibson’s Offering Leader for Performance Management program assessment and design.