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Budgeted vs. Actual Salary Increases
In salary administration, rarely is the budgeted salary increase the same as the actual salary increase. A salary increase, by definition, is the amount of additional dollars to be paid to an individual within a given time period. Administrators often confuse matters by disregarding the differences between annual salary increases and budgeted costs.
- Budgeted costs relate to a definite plan of spending additional real dollars
- Annual salary increases refer to the total percentage actually granted
The only time when annualized and budgeted percentages are the same is when all increases are granted at the first of the year.
Example of salary increases
Your company's budget for salary increases for the coming year is $75,000. On January 1, your company granted a 3% general increase to all employees. On July 1, it granted a cost-of-living increase of 2%. If the total salary on December 31st of the prior year is $1.5 million, did your company go over budget with the increases?
Salary on December 31st = $1.5 million
The 3% general increase granted to all employees on January 1:
$1.5 million x 0.03 = $45,000
The 2% cost-of-living increase granted to all employees on July 1:
Step 1
$1.5 million / 2 = $750,000 (July to December current salaries)
$750,000 x 0.02 = $15,000 (apply the cost of living increase)
Step 2
$45,000 / 2 = $22,500 (July to December portion of general increase)
$22,500 x 0.02 =$450 (apply the cost of living increase)
The 2% increase applies to current salaries as well as to the 3% general increase but only in the period July to December, or half a year. So you must divide the amounts for a year by 2 and then take the 2% cost of living increase.
Total increases:
$45,000 + $15,000 + $450 = $60,450
Since the budget for salary increases is $75,000 and the actual total salary increase is $60,450, your company did not go over budget.
For more information on developing a salary administration plan, refer to https://www.hr-guide.com/data/G420.htm.
Memory Jogger
Your company's budget for salary increases for the coming year is $100,000. On January 1, your company granted a 7% general increase to all employees. On July 1, it granted a cost-of-living increase of 4%. On October 1, it granted a merit increase of 5% over base salary only (salaries before general and cost-of-living increases) to all employees. If the salaries total at the end of the prior year was $1 million, will your company go over budget with the increases?