Salary Increase Planning

Top-down Budgeting

Under a top-down approach towards financial budgeting, the recommended salary increase budget would be prefilled into a budgeting system or worksheets either by Finance or Human Resources. This would include merit budgets, adjustments to minimum wage, adjustments to salary range minimums, internal equity funds, market adjustments, etc.

The strength of top-down budgeting is consistency in budgeting throughout a business. As part of top-down budgeting, management would still input budgets for new hires, terminations, promotions, and transfers. The sum of all department salary increase budgets should add up to the company-wide estimated budget. This is apportioned to each organizational unit. This may take place through a number of organizational levels, so the allocation process is repeated a number of times with smaller and smaller amounts. Each manager ends up with a given amount of money to allocate to pay increases, or (more likely) a percentage by which last year's labor costs may change. The end result is a proposed pay rate for each employee.

When the product is a percentage, the organization starts with the change in salary structure and determines a percentage by examining the:

• change in the labor market over the year
• current position of the organization in relation to that change
• organization's pay policy
• current economic health of the organization

This approach towards budgeting requires a number of steps:

Training. Human Resources and Managers need to be trained on the key points of the annual company compensation program, and how to use the company's budgeting methodology, salary increase guidelines, and budgeting instructions to come up with salary increase requests. Human Resources and Managers must also be given information regarding salary ranges and, when relevant, labor market data.

Develop and distribute budget worksheets. Managers need to have the worksheets organized in a way that they can understand and know what input they need to provide.

Worksheets should contain the following information:

1. Current pre-filled information for the worksheet such as:
   1. Employee name and identification data
   2. Position title
   3. Grade level and position in the grade (step or percentile)
   4. Current base salary, bonus, and total cash compensation
   5. Current compa-ratio
   6. Type, date, and amount of last increase
   7. Date of next increase
   8. Approved salary increase budget
   9. Proration for salary increase if applicable
   10. New base salary, bonus, and total cash compensation
   11. New compa-ratio
2. Data to be added by the manager:
   1. New hires, terminations, leaves of absence, transfers, promotions
   2. Effective dates
   3. New compa-ratio (discussed on the next page)
   4. Planned exits from the unit (resignations, retirements, leaves of absence, transfers)
   5. Review and approval of total budget for submission to applicable manager/Human Resources/Finance

Provide advice. Experts should be available to advise managers on the proper way to complete worksheets.

Check completed worksheets. Examine completed worksheets to ensure they are completed correctly and have stayed within guidelines.

Provide managers with feedback. Combine the various worksheets into a company budget and provide feedback on results to all managers.

Obtain required approvals. A company budget is typically completed to represent the entire organization's spending on compensation for top management approval.