Compensation & Payroll

Creating a Salary Increase Matrix

Q: How do I create a salary increase matrix? My company would like to use this for calculating annual merit increases.

A: Before you create your salary increase matrix, you need to know the following: What is the goal of your merit increase program? Does your company pay below market, at market or above market? If you're below market, do you want to make your company's compensation program more competitive? If you're at market, do you want to continue the status quo? And if you are above market, are you trying to hold down salary growth? What is your company philosophy toward excellent performers? What about your sub-standard performers?

Consider using one of the two approaches outlined below in determining salary increases.

Broadband Approach

If you use a broadband pay structure, you would typically have a percentage increase amount for each level of employee performance regardless of where the employee salary is relative to the midpoint. You would design a spreadsheet with employee ratings on the left side, and only one corresponding increase amount for each rating.

There are some initial steps you would need to take before you create your spreadsheet.

First, determine what the average projected merit increase among companies for the coming year is. Normally, this information becomes available in various surveys in mid-to late November of each year.

Next, determine what your overall salary increase budget is. Then, review your previous year's evaluations to determine a rating distribution. Find the center of distribution (the rating with the most employees). Assuming that this represents your average employees, this will be the group that gets the median or average increase.

Next, determine the rest of the rating categories (for example, you could use outstanding, above average, below average and unsatisfactory), determine the percentage of total employees in each group, apply that percentage to your total merit increase number times the overall merit
increase target to find the increase distribution for each group.
Or, you can simply take your center and make an educated guess on the performance distribution so you'd have something like:
Performance increase pool amount (total amount available for increases)
Ratings
Outstanding—5.5%-6%
Above Average—4.5-5%
Average—3.5-4%
Below Average—2%
Unsatisfactory—0

Compa-Ratio Approach

Another way to approach salary increases would be by using a compa-ratio. The first step when using a compa-ratio is to identify where each employee is relative to midpoint. For example, employees with a compa-ratio of .80-.89 are below the midpoint of their grade. Therefore, you want to not only reward them based on merit, but also provide a higher percentage increase to bring them up in the pay grade. Employees with a compa-ratio of 1.1 - 1.2 are being paid above the grade midpoint. Therefore their raises will be less. The idea is to provide more internal equity.

On the left side of your spreadsheet, enter the performance level (usually 1 through 5 or outstanding, above average, average, below average and unsatisfactory). Across the top, enter your compa-ratio segments. For example, you could use .8 - .89; .9 - .99, 1.0 - 1.09, and 1.1 - 1.2. Then in the grid below you'd assign your percentage increases. A very high performer in the .8 - .89 would get the highest increase, since they are on the low end of the pay scale compared to their performance, while a poor performer in the 1.1 - 1.2 range would get the least percentage increase, since they are on the high end of the pay scale, compared to their performance. The sample at www.shrm.org/hrtools/forms_published/CMS_021272.asp#P-8_0 may provide some guidance.

Article by Margaret Fiester, SPHR, is an HR knowledge advisor for SHRM's Information Center from http://www.shrm.org/kc/solutions/articles/archives/CMS_021536.asp#P-8_0