Surviving your next merit cycle

May 18, 2021
min read
Morgan Melo

Once or twice a year, People teams find themselves drowning in fifty different spreadsheets with columns that go to “QZ”. You run your standard process to break them down for each manager, diligently removing all the Google Sheet history so no one can view the master sheet with everyone’s comp in it. Next up, distribute to managers and hope none of your formulas get broken — and alas, you’re off to the races!

Merit cycles are that moment when you can take your pay-for-performance model and see it in action! For companies large and small, this is quite the feat, which is exactly why we built our compensation planning tool.

In an attempt to assist teams in avoiding speed bumps, we’ve compiled a few best practices to help with your next merit cycle. See our recommendations for merit cycle metrics here.

Set eligibility guidelines and timing in-line with your comp philosophy

A few common eligibility requirements are:

  1. Only employees who have been with the company for 6 months are eligible for a comp change.
  2. If someone has had a comp change within the last 12 months, they are not eligible for another.
  3. You must be in the role for 12 months before you’re eligible for promotion.

Now, you have a list of eligible employees for this cycle.

Budget for all your teams

Budgets look different company-to-company, but a few common cases are:

  1. The “peanut butter approach” — Take a % of total salary expense and spread it across the company (e.g. total new expenditure is 4% of current salary expenditures).
  2. The “no budget” — If you’re building this from the bottom up, some teams collect recommended increases based on the comp change framework and pray the CFO is on board with the total once all the work is done.
  3. Department by department —At times, it makes sense to give certain departments more budget to allocate (e.g. Engineering gets 7% and G&A gets 4%).

Make recommendations for managers and decide how much decision-making latitude you’d like to give them

If you’re thinking Excel formulas and how to lock them from being edited, you’re thinking correctly. Recommendation logic is which factors you’re basing someone’s comp change on and is specific to each company. This could include salary, variable, bonus, and even new equity shares. A few common approaches we see:

  1. Performance-based — Each performance rating = a defined % increase.
  2. Comp band target — Recommendations are intended to move each employee toward a certain place in their comp band (e.g. push folks toward the mid-point or 75th percentile).
  3. A combination — A combination of both. This is a challenging “if this, then that” Excel formula.

This logic will inform a “recommendation” for what managers should suggest, and it’s up to you to determine how much override power and discretion you’d like to extend.

Run executive approvals

Once you’ve gathered feedback from managers, you’ll likely have a few layers of approval to get through before these changes make their way to a reward letter. Approval flows differ from company to company and even department to department.

The big kicker here is: maintain a history of who submitted and approved which changes. This way, in a year’s time, when an auditor is pestering you about who approved Jane’s raise, you are ready with the evidence!

The fun part: Come up with a comms plan for employees

Reward letters have become table stakes and .pdf total comp statements tend to be a “we did it once” activity (they’re a ton of work and impossible to keep up-to-date).

However you decide to communicate the results to your employees, just make sure you do!

This should be the magic moment when comp philosophies come to life, keep employees engaged, and keep them around. If you’re looking for inspiration, you can check out Pave Total Rewards Statements and Reward Letters here!

Learn more about Pave’s end-to-end compensation platform
Morgan Melo
Sales at Pave
Took an early retirement as a CPA to pursue a career in sales. Equity nerd. Compliance lens. Carta expert.

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