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Compensation Budget Information

December 1, 1999
Related Topics: Compensation Design and Communication, Featured Article
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The amount of money companies spend on employee compensation each year represents a significant portion of operating expenses. Average payroll costs run anywhere from 23% (retail) to 41% (service firms) of the entire operating budget of an organization.

As a result, compensation planning is clearly one of the most important responsibilities of today’s compensation professional. Annual compensation planning involves preparing budgets to address salary increases, salary structure adjustments, promotion increases and variable pay expenditures. Typically, the budget process occurs well in advance of fiscal year end so that cost projections can be included in operating budget forecasts for the coming year.

Compensation professionals can access a multitude of resources to assist them in establishing realistic and competitive projections for the annual compensation planning process. These resources include published surveys from private research companies, surveys from professional affiliations, local area data from city or state entities, national information from government agencies, articles in industry magazines or professional publications. In addition, other methods include networking with other compensation professionals in their market or industry and attending a variety of seminars and presentations focusing on current trends and practices in compensation.

As the year 2000 approaches, compensation plans will undoubtedly be developed in consideration of the following practice trends:

Salary increases have remained relatively flat over the past two years, hovering at 4.0–4.5%. According to the American Compensation Association’s (ACA) 1999-2000 Total Salary Increase Budget Survey, which combines responses for cost-of-living adjustments, merit increases and equity adjustments, no significant change is projected for 2000:

Total Salary Budget Increases—United States

 

Actual
1998

Actual
1999

Projected
2000

Nonexempt Hourly Nonunion

4.1%

4.1%

4.1%

Nonexempt Salaried

4.2%

4.2%

4.2%

Exempt Salaried

4.5%

4.4%

4.4%

Officers/Executives

4.6%

4.5%

4.5%

The same type of budget information is also available from ACA or other resources in various data segments including industry, region, and company size. In a recent survey from PricewaterhouseCoopers, Compensation Planning Survey: 2000, average projected merit increases for FY2000 by industry are as follows:

Industry

Executives

Mid Mgmt

Professional

Business Services

4.3%

4.2%

5.0%

Communications & Telecomm

5.0%

5.0%

4.8%

Computer, Electronic Equipment & Related Products

4.9%

4.8%

4.8%

Financial Services

4.1%

4.0%

4.2%

Healthcare

4.2%

3.7%

3.6%

Services—All Other

3.9%

4.1%

4.0%

Utilities

4.0%

3.8%

3.8%

Wholesale/Retail

4.4%

4.3%

4.3%

Companies with particular concerns regarding high tech, or information technology talent will be pleasantly surprised to find merit data readily available. The PWC survey reports planned increases for IT positions with hot skills at 5.6%, down from 1999 increases of 5.9%. Many other publications include comprehensive salary planning data for the information technology market as well.

Salary structure adjustments are typically applied in blanket fashion to all existing salary ranges within an organization, i.e., the adjustment amount is added to the minimum, midpoint and maximum of traditional salary ranges, or to the market anchor or broad range of a less traditional salary management structure. Salary structure adjustments have remained fairly steady over the past few years and typically lag merit increase budgets by approximately 1.0—2.0%. FY2000 is no exception as reported by PWC:

2000 Planned Salary Structure Adjustments

Executives

2.9%

Middle Mgmt

2.9%

Professional

2.9%

Only one area is experiencing a significant difference from the norm in salary structure adjustments, of course, information technology. More and more companies are reporting establishing separate salary range programs for IT positions, and adjusting those ranges at a more accelerated pace than the standard ranges. Survey data suggests IT ranges will move as much as 2.0% to 3.0% more than the ranges established for non-IT jobs.

Promotion budgets are typically calculated as a percent of base salaries and refer to the amount set aside or specifically budgeted for promotional increases throughout the year. Survey data indicates the following budgets planned for 2000 promotions:

Executives

2.3%

Middle Mgmt

2.2%

Professional

2.2%

Variable pay plans are designed to reward employees for achieving specific company and/or individual performance goals. This includes bonus or incentive plans that typically pay out in cash based on achievement of specific annual performance measures (although more frequent payouts may be made depending on business cycle and ability to measure results).

The size and amount of awards in incentive or bonus plans typically varies from period to period based on company and/or individual performance results. Variable or incentive pay plans are becoming a significant element of total compensation packages across all industries. Consequently, companies are reporting an increase in the amount of funds used for these plans.

In the US, 63% of ACA’s survey respondents currently use at least one type of variable pay plan. Variable pay is still most prevalent among management and exempt salaried employees. ACA’s respondents use across their organizations as follows:

  • 74% use variable pay to award performance at management and exempt levels
  • 43% use variable pay to award nonexempt salaried employees’ performance
  • 38% use variable pay to award hourly employees’ performance

According to recent Hewitt Survey Findings: Salary Increases 1999-2000 the average cost of variable pay plans as a % of payroll was reported as:

 

Actual 1999

Projected 2000

Salaried Exempt

9.3%

9.6%

Salaried Nonexempt

5.5%

5.4%

Nonunion Hourly

5.1%

5.1%

Union

4.7%

4.1%

A recent survey in the November 1999 IOMA’s Pay for Performance Report indicates that variable pay plans are number one on HR/compensation manager’s wish list of items to adopt or expand the use of in their organizations.

Recent Articles by Jennifer Sunderland

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