Develop a Salary Budget Recommendation You Can Sell to the C-Suite

Navigating a challenging labor market continues to put pressure on internal pay equity in many organizations. As more organizations publish salary ranges, knowledgeable candidates are equipped to negotiate starting rates that create compression with existing employee pay rates. It is, therefore, crucial that you develop a salary budget that will maintain any required pay equity and be sufficient to retain your best and brightest. But, it also has to be one that top executives will approve.

Course: Understanding Pay Equity

Depending on the specific labor market in which you compete for talent, a 3% to 4% merit increase most likely will not be a strong retention tool for top talent. To retain 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 may recommend (choose one):

The same budget as the prior year
An increased budget
A decreased budget.

How do you determine what your recommendation to the C-suite should be? This article shares three steps that may help you with that selection.

Step 1: Obtain and Prepare Supporting Data 

The initial step in preparing your salary budget recommendation requires data. You should determine where your current pay levels are relative to market pay levels. Once you know the current state, 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 is available, directly to the reported pay levels of similar positions in the market. 
Obtain data on your current attrition and hiring. What are you having to pay to attract needed talent? Is there a gap between new-hire pay levels and existing employees performing the same level of work with the same skills? Who are you losing employees to and why?
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.
Consider some deeper financial questions. What have your variable pay levels been? Are actual payments competitive with market actual payments? How do your base pay and variable pay strategies align? Your base pay budget should ensure maintenance of your overall compensation mix between base pay and variable pay.
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?
Prepare a minimum of three alternative budget scenarios, such as: a) your preferred budget recommendation, b) a lower budget and c) a higher budget. This can allow the C-suite to apply its personal judgment on the best solution for the organization.

Step 2: Identify and Prioritize Strategic Business Needs

It is important to understand your compensation needs relative to the organization’s strategic business plans. As you consider the data from Step 1, ask and answer questions such as:

“Where are we targeting to grow our business?”
“Where do we need to invest to attract and retain talent?”
“Where is the competition putting pressure on our pay practices?”
“Do we have any areas where we need to do pay equity adjustments?”
“Are pay equity adjustments to be covered by the merit budget or is there a separate budget?”

Such prework may help you demonstrate alignment to C-suite priorities.

Business priority alignment can be 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 organizational focus. Retaining employees in that unit may be a key strategy in supporting business growth. Alternatively, in a business unit that you plan to close, you may choose to provide a reduced pay increase budget as you may be strategically encouraging employees to exit the organization. 

Step 3: Collaborate with Finance to Prepare Budget Scenarios

Work with your finance partners as you prepare various budget scenarios. If you already have backing from finance when you present your recommendation, your path to approval will likely be clearer.

When examining your data and business needs, consider, “Can we afford this?” If you can’t, you likely need to work with finance to build an affordable budget. Such collaboration 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. 

Webinar: Dive into the Future: Salary Budget Planning for the Year Ahead

Presenting the facts in the data will likely help you identify and address potential risk areas. Show how your budget recommendation will impact the sales, general and administrative (SG&A) line of the organization’s income statement. Consider 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 for a full 12 months. Conversely, it will cost $1,200 if it is given halfway through the fiscal year and is effective for only six months. 

Selling Your Salary Budget 

Once the three steps are completed, you may be positioned for C-suite approval if your salary budget recommendation has the following characteristics:

You have targeted budgets for various business needs such as: a) high-growth markets; b) a key strategic product line; c) a specific job family or level that is critical to business success; d) areas where there is significant lag to market; and 3) 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 “eye chart” spreadsheets in your backup material; 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. 

Do Your Homework and Get an A(pproval) 

When it comes to developing a salary budget recommendation you can sell to the C-suite, simply plugging survey budget percentages into a spreadsheet is not sufficient. Do your homework by incorporating the steps in this article. 

Whether you end up recommending an increased, decreased or identical budget as last year, 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, though, likely will be a salary budget that meets with executive approval and allows your organization to keep its top employees. 

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