Scrappy Compensation: Fall Edition

Back in the Summer Edition we covered how to build a compensation structure. Check it out here if you missed it. Now that you have your framework, it’s time to build your compensation budget for next year’s planning cycle.

Why now? Many CFOs kick off annual budgeting in the Fall. Show up without a number in mind, and you won’t get a chance to shape the budget, you’ll just get told the number instead. Most of my clients run their comp cycle in Q1. If yours runs differently, work backward from your CFO’s budgeting calendar instead.

Let’s get started.

Building your compensation budget

Whether you are starting from scratch or optimizing last year’s budget, here’s your scrappy four-step build:

1. Set the components of your compensation budget.

2. Run benchmarking analysis.

3. Build your compensation budget.

4. Run a sensitivity analysis.

Step 1: Set the Components of your Budget

• What types of adjustments to include: Merit only or promotions too? Do you want room for market adjustments to address pay equity? Will some or all employees be bonus-eligible? If you can name a type of compensation increase, you should consider budgeting for it.

• Think beyond cash: Consider whether you'll include equity grants in this cycle (e.g. promo or refresh grants).

• Keep it simple: If this is your first cycle, a merit and promotion budget is enough to start.

Step 2: Build Your Architecture

• Collect your benchmarking data: Pull in market data on projected compensation increases. WorldatWork publishes this annually for the general industry and is usually first to report — they're projecting 3.6 % for 2027. Other sources publish numbers by industry sector; tech usually runs highest.

• Check what's actually in the number: Make sure you're comparing apples to apples — is it merit increase only, or total planned spend across merit, market adjustment, general/COLA, promotional, and other adjustments? The WorldatWork number above is “all in.”

Step 3: Build Your Budget Model

• Pull your data: Get a full employee download from your HRIS, including date of hire and salary.

• Set eligibility: Decide who qualifies for an adjustment this cycle. Most of my clients require at least 6 months of tenure.

• Tally total payroll: Sum the salaries of eligible employees.

• Calculate your budget: Multiply total payroll by your salary budget % — e.g., a $10M payroll at 3.5% gives you a $350,000 compensation budget.

Step 4: Run a Sensitivity Analysis

• Model a range, not a single number: CFOs want options. Run a low and high scenario alongside your target and include all three in your model.

• Example: targeting 3.5%? Run a low option at 3.0% and a high at 4.0% to give your CFO a full "what-if" analysis. 
  

Congrats! Now you have a Compensation Budget proposal that you can present to your CFO and to be in a better position to influence the budget outcome.

How to take it to the next level?

To give a true Total Compensation spend picture to your CFO, be sure to include bonus awards and annual equity grants in your budgeting process. You may not know the results of the performance metrics/goals but it is helpful to calculate the cost at target achievement.

Up Next

Get ready for the Winter Season

Now that you have a pay structure and a compensation budget your CFO will approve of, you will be ready for the next important step.

Be on the lookout for the Winter Edition in December where I will cover how to run a scrappy annual compensation planning cycle.

Scrappy Compensation: Summer Edition

Building a framework is not a math problem, it is forming a philosophy, creating a structure, and letting your employees know about it.

Let’s get into it.

Building your pay structure

The first part of this journey is to build your pay structure. Whether you are starting from scratch or optimizing a current structure, follow these four basic steps to build out a scrappy compensation structure:

Step 1: Articulate Your Philosophy

• Target market percentile: Do you want to be ‘at’ or ‘above’ market? Will it vary by compensation component and/or role?

  • If you are not sure, start with the 50th percentile (market median).

• Compensation mix: What do you offer? Base salary and equity only? Will you include a bonus?

  • If it is overwhelming, start with your base salary structure first and build the other components out at another time.

• Geographic differentiation: Consider if you would like to have a location-based compensation to anchor your pay bands.

  • If you have talent in multiple countries, each country should have its own pay structure. 
    
    

Step 2: Build Your Architecture

• Define job levels: Do you want 6-8 broad job levels for a flatter structure or 12+ narrower ones for more granular career progression steps?

  • You can leverage job levels from the compensation benchmarking database you are using, no need to create your own.

• Define job families: Take the time to organize all of your jobs and employees into a defined set of job functions and job families.

  • You can leverage the structure from the benchmarking database you’ve chosen.

• Map current roles to those levels: Take your full list of employees and map them to the structure you created based on the leveling definitions, not justjob title.

Step 3: Run Benchmarking Analysis

• Create your benchmarking spreadsheet: Pull in the market data with the relevant market percentiles from the benchmarking database you are using.

  • If you are positioning at the 50th percentile, be sure to bring in 25th and 75th percentiles as well.

• Assess employee pay against the market: This is your first look at how your current pay practice compares to your targeted market position and an opportunity to evaluate if you should shift that targeted market position up or down.

Step 4: Build Your Pay Bands

• Assess how precise you would like to be: Would you like to have precise pay bands for each job family or are there natural market value groupings that you can create by employee segmentation.

  • Creating pay bands for every job family requires more time and effort to create and maintain vs grouping the pay structures into two to six buckets (e.g. technical, business, revenue job families etc.).

• Build your pay bands: Evaluate your benchmarking data by job level and build salary midpoints with the aim of creating smooth progressions from job level to job level while trying to stay as close to the targeted market position as possible. 

• Assess employee pay against the pay bands: Compare current pay against the bands and take note of those that are below the minimum of their pay band and those that are above the maximum of their pay band. 

Congrats! Now you have a pay structure that will set you up to make thoughtful pay decisions in the future.

Ready to take your pay bands to the next level?

Consider varying your target market position by job family or employee segment based on the competitiveness of the talent market. Go with a higher target market position for job families where it is more difficult to attract and retain the talent that you need.

Up Next

Get ready for the Fall Season

Now that you have a pay structure, you will be ready to do your budget analysis and advocate for a competitive budget to address pay equity, market adjustments, promotions and regular salary adjustments. 

Be on the lookout for the Fall Edition in September where I will cover more on how to build a scrappy compensation budget.