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Merit is a Key Compensation Factor. Do You Know 3 More?

April 11, 2015

When it’s time to plan your company’s compensation budget, there are a variety of key factors to consider. Basing your compensation budget on merit is one obvious consideration. But if your compensation budget is based almost solely on merit, you could be overlooking important components to help you maintain compensation equity and retain top performers.

So, what are the 4 compensation budgeting factors you must consider?


On the surface, basing your compensation budget on merit seems simple enough, right? After all, you want to reward your best team members and encourage underachievers to reach higher. But when determining merit increases, you must first consider three things: 1) what competitors in your market are doing, 2) what your organization can afford, and 3) other non-salary investments you make in your employees.

First, keep an eye on what your market competition is doing for salary and other compensation elements. Will your merit compensation plan allow you to keep pace? If not, your competitors might begin to lure your best staff members to their team.
Next, examine how your desire to reward your best performers fits with what your company can afford. Do you need to consider non-salary reward alternatives in order to keep your company profitable?

And speaking of those non-salary rewards, pay attention to other investments you make in your employees. These can include total compensation components such as benefits, training, technology improvements, etc. If you are rewarding your employees in ways that make your company a desirable place to work – via salary or other reward components – you will increase your chances of keeping your top talent.


To help maintain balance and compensation equity throughout your organization, you may want to budget some funds for an internal equity review. What could such a review determine? For starters, it could help you see if internal compensation “compression” is occurring in your organization? The compression of employee salaries can happen over time. To help ensure compensation equity, you should review the education, experience, and performance of every employee in the same job title. If their pay is not properly aligned, make the necessary – and equitable – corrections. A discrimination analysis might also indicate some equity adjustments are needed. (I’ll share more information about this in a future article.)

Market Adjustments

Periodic market reviews are always a good idea. While overall salary and total compensation averages can sometimes be predictable, we occasionally see big jumps in market data for certain positions. These jumps can result from market demand for a shallow pool of talent with specific and highly desirable skills. Knowing that certain of your team members are in high demand can help you determine where to make pay adjustments beyond merit increases.


Internal promotions send the message to employees that hard work and dedication pay off. Indeed, most promotions include a salary increase. But how does your company handle these increases in your compensation budgeting? Some companies set up a separate budget to cover this expense while others absorb the increases through turnover and vacant positions throughout the year.

Bottom Line:

Whether your organization chooses to have one overall budget or separate compensation budgets for each of these four areas, you should consider the total dollars needed so your budget does not come up short before the end of your fiscal year.

If you need assistance establishing your compensation budget or want an analysis on merit increases specific to your industry, contact Total Reward Solutions today at 317-589-8529. We look forward to helping you gain perspective and confidence as you compete in your marketplace.

Did You Know?

Kenexa, an IBM company, is reporting that wage increases in 2012 averaged 3.0% and will average 3.0% again in 2013. WorldatWork, meanwhile, is reporting that increases in 2012 averaged 2.8% while 2013 increases are projected to be at 3.0%. Keep in mind that these are national averages, so these figures might not be appropriate for your industry or region.

Posted Under: Budgets