The Science and Art Behind Your Annual Salary Budget

Every year, compensation professionals go through a familiar ritual. Salary budget surveys arrive, data gets analyzed, medians get calculated and eventually someone asks the question you know is inevitably coming: “So, what’s the market change this year?”

Maybe it’s 3.5%. Maybe it’s 4%. Whatever it is, there’s something reassuring about having a clean number backed by a market survey. It feels scientific. And, it is … at least partly.

The challenge, and perhaps the opportunity, is that you have never had more data available to help answer the “market change” question. Traditional salary budget surveys are now just one source among compensation databases, employee-reported data, job postings and recruiting intelligence, government data, payroll data, economic indicators, skills data, geographic differentials and increasingly massive datasets built by combining many of them. There’s plenty of information, and you can buy almost all of it. That’s a plus.

The Science Adds Up

Compensation teams no longer need to find one magical survey or dataset that answers every question. Increasingly, you can buy the pieces you need for the problem you’re trying to solve. That’s the science part of salary budgets.

A good salary budget survey remains an incredibly valuable starting point. It provides a bearing check. What are organizations planning? Are budgets increasing or decreasing? What happened last year compared with what companies expected? How do the numbers vary by industry, geography, company size or employee population? However, salary budget data is just one piece of the puzzle.

Suppose a survey shows organizations are planning an average salary increase budget of 3.5%. Before deciding whether your organization also should spend 3.5%, there are many more pieces you likely would want on the table. You should consider:

• What is happening to market salaries for the jobs you employ?
• Where are employees positioned relative to your target market?
• What is happening with turnover?
• Are certain skills becoming harder to recruit?
• Are you losing your best performers or people in critical roles?
• What is happening with the cost of labor where you operate?
• And, perhaps most importantly, what can the business truly afford?

There is never a shortage of questions.

Different data sources answer different pieces of those questions. Traditional compensation surveys may be terrific for benchmarking established jobs. Job posting data can provide a more immediate view into hiring activity. Skills data can show where demand is changing. Government sources provide broader labor market context. Salary budget surveys tell you what employers expect to spend. Internal payroll, performance, recruiting and turnover data shed light on what’s happening inside your company. You don’t need one dataset to do everything. You need the right data for each question.

This is where compensation professionals should get greedy. If you’re helping make a multimillion-dollar decision about compensation spend, why stop with one salary budget survey? Bring in another source. Look at market movement. Pull your turnover data. Examine recruiting results and performance. Understand where people sit within their ranges. Bring in skills data. Talk to finance about business performance and expectations.

The goal isn’t more data for the sake of more data. More spreadsheets won’t fix it. The goal is to assemble enough of the right pieces that you can see the picture. And once you’ve assembled those pieces — once you’ve explored and performed the science of salary budgets — the work isn’t finished. That’s when the art begins.

The Art Makes It a Masterpiece

Market data informs on what organizations tend to do. It doesn’t tell you exactly what your organization should do. Perhaps you can think about it this way: “While humans, and companies, are highly statistically predictable, they are amazingly unique.”

You can predict (fairly accurately) how a large population of companies will behave. You can calculate medians, percentiles, trends and correlations. But your company has its own strategy, workforce, financial situation, talent challenges, culture, risk tolerance and business objectives. The art is taking everything you’ve learned from the market and figuring out how it applies to your specific industry, company, workforce, managers and leadership.

Imagine the market is planning 3.5%, but your organization is already paying above its desired market position, turnover is low and recruiting is healthy. Maybe 3.5% isn’t your answer. Now take another organization looking at the exact same survey. Its critical employees are below market, turnover is climbing, recruiting takes longer and competitors are aggressively hiring people with the skills the business needs to grow.

It’s the same survey, same 3.5% and same science. The art, though, is very different.

The Numerical Picture Comes Together

The secret sauce in all this isn’t owning the most surveys, buying the biggest dataset or finding the provider with the fanciest dashboard. It is putting the right puzzle pieces together, and then understanding what the completed puzzle means for your organization and their people.

Compensation data, salary budgets, workforce analytics, payroll, benefits, recruiting, performance, skills, turnover and business results each tell you something individually — the “what.” When those pieces are connected, they start telling you the “why.” Applied to your organization, they start influencing how to proceed, and maybe even how to predict changes that are coming.

So, absolutely buy good data. Use multiple sources. Get greedy and choose the best dataset for each piece of the problem. But remember, having all the puzzle pieces isn’t the same as solving the puzzle.

Science gives us the pieces. The art is putting it together and creating your own unique picture.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Finance and Budgeting
• People Analytics