Geared for Success: The Benefits of More Frequent Compensation Cycles

One of your employees is churning out bonus-worthy work. A new hire brought in at current market rates is causing discord among long-tenured team members who are earning about the same. A high performer has taken on manager-level tasks and deserves a promotion.

But … your annual compensation cycle is still many months away — and those employees may start job-hunting elsewhere rather than waiting that long for a pay bump or incentive payout.

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Establishing Extra Comp Cycles? Don’t Forget These Steps

Organizations increasingly address challenges like these by holding more than one compensation cycle each year. Among employers analyzed by people analytics company Visier, 38% conducted two salary reviews a year in 2021, compared with only 11% in 2017. And in 2022, 4% of organizations said they were conducting three or more compensation cycles per year.

Taking this approach can help businesses more quickly address issues with pay compression or pay inequity, substantial market shifts or timely changes in employee performance — while avoiding the confusion or additional issues that may arise with unscheduled, seemingly random off-cycle compensation moves.

Making the switch to multiple pay cycles a year can be a heavy lift — and is one to approach strategically, said Peter McKee, the founder and CEO of compensation planning company Aeqium.

“The obvious question rewards leaders have for themselves is if they have the time and the capacity,” he said. “Running another cycle — especially when you have a lot of employees — feels like, ‘We just went through the Super Bowl, and now we’re going to do another one of those?’”

Getting a grasp on why you may need additional compensation cycles likely will help you home in on how to approach them.

Rewarding Performance and Tackling Market Changes

Additional cycles can help organizations compensate employees for performance that managers don’t want to wait too long to recognize — whether through promotions, bonuses or special-case pay increases.

Annual compensation cycles may not always take the full picture into account, said Rebecca Gorman, a principal at Strategic Rewards Advisors, LLC.

“There is often a tendency with focal-point compensation planning cycles for only the last few months of the cycle to become the basis for an employee’s review — [this is known as] recency bias,” she said. “The great things you did the first half of the year seem to go by the wayside. Semi-annual compensation planning can mitigate this considerably.”

Extra pay cycles also may better equip managers to respond to significant market changes that affect a role’s salary, including by responding to external offers employees may receive due to those changes, McKee noted.

Addressing Pay Compression

When new hires join an organization making close to or more than longtime members of the team, leading to pay compression, extra pay cycles can help soothe resentments before tenured employees decide to leave — and high performers are the first to go, said Andrea Derler, a principal of research and value at Visier.

Visier found that workers whose pay was adjusted within six months of a higher-paid new team member being hired were more likely to stay with the employer — and that likelihood was higher still if their pay was adjusted within a month.

“[Your high performers] have experience and institutional knowledge, and suddenly a new person who may not know much about the company is earning more. This causes the perception of unfair treatment,” Derler said. “But if pay adjustments are happening within months, and you can adjust tenured employees’ salaries up a bit more, the risk of resignations is much lower.”

Improving Pay Equity

Organizations may consider adding extra pay cycles to help close an identified pay gap — but if they choose to do so, there are several considerations to take into account.

Derler noted that pay equity issues should almost always be their own project (such as that undertaken by multinational food company Barilla), rather than being addressed in additional pay cycles that also take merit or market adjustments into account.

“Combining merit increases with also needing to bring a person up because they’re below where they should be can muddy the waters, so it’s good to have those things separate,” Gorman added.

If organizations are choosing to use additional pay cycles to close pay gaps in smaller increments rather than in quicker time periods or larger chunks, they should consult an attorney to ensure they are addressing inequities appropriately rather than too slowly, McKee said.

He stated that while an organization adding a pay cycle likely wouldn’t conduct a full, second pay equity analysis as part of that cycle, it should ensure other pay adjustments don’t create or worsen pay inequities.

“If you are going to be doing a promotion cycle, you should still be looking at that through the lens of pay equity as well,” McKee said. “Are you seeing similar promotion rates across gender, race and ethnicity? Anytime you’re making those decisions, you want to review to make sure there’s nothing getting out of whack [with equity].”

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