Salary Increase Matrix: Giving Salary Increases Within the Budget

Introduction

This is Part 2 of my articles on the Salary Increase Matrix.Unless you have a good reason to exceed the approved budget for the total annual increases, you are likely to face an uphill struggle to get approval for a supplementary budget for the difference; and at the same time risking the loss of your job.

Understanding What Is Compa-Ratio

Part 1 of this series of article explained about the principle behind pay salary increases by range quartiles. One of the related concept is compa-ratio.

A salary range will look like this.

salary-matrix-8

Source: Pay and Salary Structures, Ashworth Black

When you want to know how an employee’s salary or pay rate is compared with the midpoint salary or payrate, you can use the compa ratio formula given by either

Employee pay rate DIVIDE BY Midpoint pay rate or

Employee salary DIVIDE BY Midpoint salary

A compa ratio of  1 means the employee’s pay is aligned with the midpoint of the salary grade range.

0.8 to 0.89 0.90 to 0.99 1.00 to 1.09 1.10 to 1.20
80% to 89% 90% to 99% 100% to 109% 110% to 120%

First, Get Your Budget Right

If you are pegging your salary increase to the general salary increases in the job market, first you must first make sure you budget your salary increases correctly. Otherwise, you may need to get a supplementary budget approved and doing this is going to be tough.

Let Us Get Real: Difficulties With Salary Increase Matrix

The Economic Research Institute published a paper titled Principles of Merit Pay, written by Lyle Leritz. She wrote about 3 types of merit pays systems.

She mentioned that “2 dimensional systems utilizing performance ratings and position in pay range are more flexible and robust than other systems. They are more complex and difficult to administer.”

In a real world, salaries are business costs. They needed to be funded from revenues. Salary increases are build into the basic salaries, meaning that they jack up the total manpower costs in the long run. This means that businesses have to work harder to find more money to sustain its operations.

This means that you cannot pay salary increases based on the salary increase matrix that you created (fancied). Rather you have to adjust the salary matrix based on the money your organization can afford and willing to pay, that is the salary increase budget. This is a difficult task. In this article, we will look at an example to show how to compute the overall salary increase costs. In the next article, we will look at the factors that makes this technique a difficult one to use despite of the various ways we can do to minimise guessworks that are needed for this technique. It is this guesswork that Lyle Leritz called “more complex and difficult to administer”.

Let us say that this is your salary increase matrix

Quartiles (Q) in Range / Compa-Ratio
Performance (P) 1 2 3 4
0.8 to 0.89 0.90 to 0.99 1.00 to 1.09 1.10 to 1.20
Exceptional P1Q1 P1Q2 P1Q3 P1Q4
Above Expectations P2Q1 P2Q2 P2Q3 P2Q4
Meets Expectations P3Q1 P3Q2 P3Q3 P3Q4
Below Expectations P4Q1 P4Q2 P4Q3 P4Q4
Unsatisfactory P5Q1 P5Q2 P5Q3 P5Q4

 The 2 Dimensions of Salary Increase Matrix

You will notice below that there are 2 dimensions in a salary increase matrix. Typically the quartiles appear as the horizontal dimension and the performance ratings as the vertical dimension. If these 2 dimensions are subjected to change, then your work to decide on the percentage of salary increase to be distributed becomes more difficult.

Quartiles (Q) in Range / Compa-Ratio
Performance (P) 1 2 3 4
0.8 to 0.89 0.90 to 0.99 1.00 to 1.09 1.10 to 1.20 Total
0.2 0.4 0.25 0.15 1.0
Exceptional 0.15 P1Q1 P1Q2 P1Q3 P1Q4
Above Expectations 0.35 P2Q1 P2Q2 P2Q3 P2Q4
Meets Expectations 0.48 P3Q1 P3Q2 P3Q3 P3Q4
Below Expectations 0.02 P4Q1 P4Q2 P4Q3 P4Q4
Unsatisfactory 0 P5Q1 P5Q2 P5Q3 P5Q4
Total 1.0

We will be using the following example to elaborate the salary increase matrix technique to fit the salary increases into the approved budget for salary increases.

salary-matrix-7

Source: Executive Summary of the Compensation Committee Final Report, Missouri State University

Let us say that the results of this year’s performance appraisal exercise is as follows:

Number of Staff Percentage of Staff Portion of Staff
Exceptional 15 persons 15% 0.15
Above Expectations 35 persons 35% 0.35
Meets Expectations 48 persons 48% 0.48
Below Expectations 2 persons 2% 0.02
Unsatisfactory Nobody Nobody 0
Total 100 persons 100% 1.0

Let say now we split these 100 people according to which salary range quartiles the staff’s base salary falls into.

Quartile 1 Quartile 2 Quartile 3 Quartile 4 Total
20 persons 40 persons 25 persons 15 persons 100 persons
20% 40% 25% 15% 100%
0.2 0.4 0.25 0.15 1

Next, let us put the 2 dimensions together. This is without considering the salary increase that we want to assign to each cell. This is before deciding on what are the salary increase percentages to be assigned to each cell.

Quartiles (Q) in Range
Performance (P) 1 2 3 4
0.8 to 0.89 0.90 to 0.99 1.00 to 1.09 1.10 to 1.20 Total
0.2 0.4 0.25 0.15 1.0
Exceptional 0.15 0.15×0.2

=0.03

0.15×0.4

=0.06

0.15×0.25

=0.0375

0.15×0.15

=0.0225

Above Expectations 0.35 0.35×0.2

=0.07

0.35×0.4

=0.14

0.35×0.25

=0.0875

0.35×0.15

=0.0525

Meets Expectations 0.48 0.48×0.2

=0.096

0.48×0.4

=0.192

0.48×0.25

=0.12

0.48×0.15

=0.072

Below Expectations 0.2 0.2×0.2

=0.04

0.2×0.4

=0.08

0.2×0.25

=0.05

0.2×0.15

=0.03

Unsatisfactory 0 0 0 0 0
Total 1.0

Let us now round up the numbers to 3 decimal places.

Quartiles (Q) in Range
Performance (P) 1 2 3 4
0.8 to 0.89 0.90 to 0.99 1.00 to 1.09 1.10 to 1.20 Total
0.2 0.4 0.25 0.15 1.0
Exceptional 0.15 0.03 0.06 0.038 0.023
Above Expectations 0.35 0.07 0.14 0.088 0.053
Meets Expectations 0.48 0.096 0.192 0.12 0.072
Below Expectations 0.2 0.04 0.08 0.05 0.03
Unsatisfactory 0 0 0 0 0
Total 1.0

In percentage terms, this table is shown as follows.

Quartiles (Q) in Range
Performance (P) 1 2 3 4
0.8 to 0.89 0.90 to 0.99 1.00 to 1.09 1.10 to 1.20 Total
0.2 0.4 0.25 0.15 1.0
Exceptional 0.15 3% 6% 3.8% 2.3%
Above Expectations 0.35 7% 14% 8.8% 5.3%
Meets Expectations 0.48 9.6% 19.2% 12% 7.2%
Below Expectations 0.2 0.4% 0.8% 0.5% 0.3%
Unsatisfactory 0 0 0 0 0
Total 1.0

Based on the “principle behind pay salary increases by salary quartiles” that we mentioned above, let us assign the following salary increase percentages. These percentages are our guesses. Our aim is to obtain a total salary increase percentage that falls within or equals to our budgeted salary increase.

Quartiles (Q) in Range
Performance (P) 1 2 3 4
0.8 to 0.89 0.90 to 0.99 1.00 to 1.09 1.10 to 1.20
Exceptional 6.2% 5.8% 5.4% 5.0%
Above Expectations 4.8% 4.4% 4.0% 3.6%
Meets Expectations 3.4% 3.0% 2.6% 2.4%
Below Expectations 2.0% 1.4% 0.0% 0.0%
Unsatisfactory 0 0 0 0

Now we apply these percentages to the earlier table to get the following results.

Quartiles (Q) in Range
Performance (P) 1 2 3 4
0.8 to 0.89 0.90 to 0.99 1.00 to 1.09 1.10 to 1.20 Total
0.2 0.4 0.25 0.15 1.0
Exceptional 0.15 0.03×6.2%

=0.1860%

0.06×5.8%

=0.3480%

0.0375×5.4%

=0.2025%

0.0225×5%

=0.1125%

0.8490%
Above Expectations 0.35 0.07×4.8%

=0.3360%

0.14×4.4%

=0.6160%

0.0875×4%

=0.3500%

0.0525×3.6%

=0.1890%

1.4910%
Meets Expectations 0.48 0.096×3.4%

=0.3264%

0.192×3%

=0.5760%

0.12×2.6%

=0.3120%

0.072×2.4%

=0.1728%

1.3872%
Below Expectations 0.2 0.04×2%

=0.0800%

0.08×1.4%

=0.1120%

0.05×0%

=0%

0.03×0%

=0%

0.0192%
Unsatisfactory 0 0 0 0 0 0
Total 1.0

 

Contribution Formula

The contribution formula or total salary increases in percentage term is given by

 

(P1Q1A+P1Q2B+P1Q3C+P1Q4D) plus (P2Q1E+P2Q2F+P2Q3G+P2Q4H) plus

(P3Q1I+P3Q2J+P3Q3K+P3Q4L) plus (P4Q1M+P4Q2N+P4Q3O+P4Q4P) plus

(P5Q1Q+P5Q2R+P5Q3S+P5Q4T)

In our example, the total salary increases in percentage terms will be given by

0.8490% plus 1.4910% plus 1.3872% plus 0.0192% plus 0% giving the answer 3.7464%, which is approximately 3.75%

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