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The relationship between salary review budgets and midpoint structure movements is interesting. A very long time ago I was told that the higher the annual employee turnover rate, the larger the gap between the salary budget percentage and the structure movement percentage can be without increasing cost of employment (or average pay level for the job). The logic behind this is that people higher in the range are typically replaced with people lower in the range. A typical 2% variance is a function of 10% annual turnover, and people at around 110% of the midpoint being replaced by people at around 90% of the midpoint. This 2% rule of thumb for salary attrition (to fund pay range movement) goes awry if joiners' salaries are in excess of 80% of leavers' salaries, and/or if the annual turnover rate is below 10%. A 10% difference in joiner/leaver pay levels, and a 5% turnover rate would allow only a 0.5% addition to structure movement to fund pay range movements. Any more, and the average pay levels would increase.

A company's uplift in structure midpoints should reflect changes in market pay levels. The problem is that neither a survey of reported increases in structure midpoints, nor a survey of reported salary budgets, indicate the movement in market pay levels. I think companies are providing salary budgets which overcompensate for salary attrition, which means salary levels are increasing faster than reported structure increases.

Doug:

Thanks for the thoughtful comments. I think the logic you describe does often contribute to the decision to adjust structures at a different level than salary increases are budgeted. In other cases, though, people seem to simply mimic the competitive salary budget data without thinking through the consequences and implications. Plus, not all companies experience traditional turnover patterns; for example, a number of organizations experience a great deal of churn among newer employees (part of which may be due to not paying these folks at competitive levels).

It all points to a need for being more thoughtful and planful about the whole salary budgeting process, doesn't it?

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    Compensation consultant Ann Bares is the Managing Partner of Altura Consulting Group. Ann has more than 20 years of experience consulting with organizations in the areas of compensation and performance management.

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