Compensation Focus

Developing a Salary Budget Recommendation You Can Sell to the C-Suite
By Connie Haney, Lam Research Corp.

With the labor market starting to ramp up in some areas, next year’s salary increase — or lack thereof — may send your top talent searching for another opportunity. It’s crucial, therefore, that you develop a salary budget that will be sufficient to retain your best and brightest. But it also has to be one top executives will approve.

Depending on the specific labor market in which you compete for talent, a 2% to 3% merit increase most likely will not be a strong retention tool for top talent. To keep your key contributors and high-potential employees, you may need a bigger salary increase budget, or you may need to limit who receives increases if you do not gain approval for a larger budget. To put it simply, you have three choices: recommend the same budget as the prior year; recommend an increased budget; or recommend a decreased budget.

How do you determine what your recommendation to the C-suite should be? There are three key steps you need to take: 1) Obtain and prepare supporting data; 2) identify and prioritize strategic business needs; and 3) collaborate with finance to prepare budget scenarios.

Obtain and Prepare Supporting Data
The first step in preparing your salary budget recommendation requires data. You must determine where your current pay levels are relative to market pay levels. Once you know where you are, you can model where you would like to be. What it will take to get there is your gap. This gap analysis should be summarized for your presentation to C-suite approvers.

When working with data:

  • Obtain statistically valid market compensation data from published third-party sources that include your labor market competitors, those organizations to whom you lose employees and from whom you hire employees.
  • Prepare data on your current pay levels vs. market levels. Determine where your top performers are positioned relative to the market median or, if the data are available, directly to the reported pay levels of similar positions in the market.  
  • Obtain data on your current attrition and hiring. Who are you losing employees to and why? What challenges are you facing in attracting the talent you need?
  • Prepare data on the impact of various budgets on your bottom line. This should include the percentage of employees receiving or not receiving increases and the average potential increase by performance level. Provide a minimum of two alternative budget scenarios so you have at least three scenarios:  your preferred budget recommendation; a lower budget; and a higher budget. This allows the C-suite to apply its personal judgment on the best solution for the organization.
  • Gather data on actual pay increases occurring throughout the year. If you are on a focal review schedule, what increases have you done out of your normal cycle?

Identify and Prioritize Strategic Business Needs
The second step involves understanding your compensation needs related to the company’s strategic business plans. As you are preparing your data in step one, ask and answer questions such as “Where are we targeting to grow our business?”,  “Where do we need to invest in attracting and retaining talent?” and “Where is the competition putting pressure on our pay practices?”

Asking questions like this will help you identify and prioritize your organization’s salary increase needs and will demonstrate to the C-suite your alignment to its business priorities. Such alignment is key as you model alternative budget scenarios. For example, you may recommend a budget that provides a higher average increase to employees working in a growing business unit that is a strategic focus for your organization. Retaining employees in that unit may be a key strategy in supporting organizational growth. Alternatively, in a business unit you plan to close, you may choose to provide a reduced pay increase budget, as strategically you may be encouraging employees to move out of the organization.

Collaborate with Finance to Prepare Budget Scenarios
The third step is to work with your finance partners as you prepare various budget scenarios; if you already have backing from finance when you present your recommendation, you will be well on your way to a successful approval.

Considering your data and business needs, you must ask the question “Can we afford this?” If you can’t, you need to work with finance to build a budget you can afford. Working with finance is especially important considering that while a difference between a 2.5%, 3% or 3.5% budget might equate to just a penny of earnings per share, depending on the size of your labor expense, the finance partners can make that penny a tough sell.

Presenting the facts in the data will help you identify and address potential risk areas. Show how your budget recommendation will impact the sales, general and administrative (SG&A) line of your income statement.  Make sure you take into account the timing of the increases and calculate the actual increase in labor expense that will be accounted for in that fiscal year.  For example, a 3% increase for an employee with an annual salary of $80,000 will cost $2,400 if it is effective a full 12 months.  It will only cost $1,200 if it is given halfway through the fiscal year and is effective for only 6 months.

Selling Your Salary Budget
Once the three steps are completed, if your salary budget recommendation has the following characteristics, you are positioned well for success in obtaining C-suite approval:

  • You have targeted budgets for various business needs such as: high-growth markets; a key strategic product line; a specific job family or level that is critical to business success; areas where there is significant lag to market; and higher levels of attrition.
  • You may have one overall budgeted percentage increase, but the actual budgets at the manager level may be higher or lower than average.
  • Your presentation is simple and straightforward. Leave the legal-size spreadsheets in your office; summarize how you developed your alternatives. Have an opinion on which alternative you think is best, but don’t be disappointed if a different one is selected.

Be transparent with your data — both your internal gap analysis and the market data you considered. Show that you know what the market is doing and demonstrate your knowledge of business strategic focus, and then show how your budget aligns with that business strategy.

Conclusion
When it comes to developing a salary budget recommendation you can sell to the C-suite, simply plugging survey budget percentages into a spreadsheet budget is not sufficient. You need to do your homework: 1) Obtain and prepare supporting data; 2) identify and prioritize strategic business needs; and 3) collaborate with finance to prepare budget scenarios.

Whether you end up recommending the same budget as last year, an increased budget or a decreased budget, keep in mind there’s no magic way to ensure approval. Most likely it will be an iterative process requiring some back-and-forth discussion and modeling analysis. The end result, however, will be worth it: a salary budget that meets with executive approval and allows your organization to keep its top employees.


About the Author
Connie Haney is managing director, global compensation, benefits and mobility, at Lam Research Corp. in Fremont, Calif. She can be reached at connie.haney@lamresearch.com.


Read the August 2011 edition of Compensation Focus.

Contents © 2011 WorldatWork. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.

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