What Is a “Compensation Cycle” and How Does It Work?

Carrying out regular compensation cycles, regardless of your company size or sector, can help ensure that your compensation is competitive and fair.

Planning for a successful compensation cycle is more important than ever—especially since the pandemic has led to higher turnover. While you already know how important it is to compensate employees fairly, compensation cycles involve a lot of moving parts and can take up a ton of time. 

During compensations cycles, you have employees waiting on you for pay increases, but you also need to consider various levels of input from different parties. In other words, it ends in a lot of meetings, emails, and stress for your HR team. 

We’ve developed an easier way to plan and execute compensation cycles using automated processes and the ability to bring all the relevant data into one place in Pequity.

But first, here is the breakdown of what comp cycles are, and how they work. 

What Is a Compensation Cycle? 

Compensation cycles—or ‘comp cycles’—are the process of reviewing employee compensation by benchmarking against company objectives and the wider market. However, it’s more than just salaries. Compensation decisions include salaries, benefits and incentives, essentially the total rewards. 

The compensation cycle process also requires HR to consider the market value of a role, the cost of living in an employee’s location, demand and availability for certain jobs, and company objectives and performance.

In short, it’s a comprehensive view of a company’s compensation plan to ensure they are fair and still meeting the company’s financial and strategic goals. 

Why are Comp Cycles Important? 

Comp cycles are critical to any business because they ensure that your company remains competitive in hiring and retaining top talent and fair in removing inconsistencies and bias. For many employees, salary is a key factor in deciding whether or not to stay. In fact, 49% of employees say they would have stayed with an employer longer if they had received a higher salary. 

Reviewing salary data regularly is key, especially since the pandemic has altered pay drastically. By having competitive compensation, and regularly reviewing it through comp cycles, your company can attract, retain and reward top talent to help reach company objectives. 

How Does a Compensation Cycle Work?

Planning your compensation cycle involves multiple moving parts and various levels of involvement. Everyone from the CFO to the HR team to middle-managers may be involved in a compensation cycle. 

Here are the seven most common steps in the compensation cycle: 

1. Review your last comp cycle and goals

Before starting the next comp cycle, review the previous one with key stakeholders so you can evaluate your process and timeline. This is the perfect time to make adjustments to be more efficient if needed. Then, review your company goals. Is your strategy to retain top talent, recruit new talent, or a bit of both? Company performance as a whole will also play a role here; if the company has been performing well, it will be easier to allocate budget for increased compensation whereas if company performance has dropped, your CFO may request you hold off on salary increases. 

2. Consider software options

Investing in software can make the compensation cycle process much easier, faster and more efficient. For instance, Pequity can help simplify the comp cycle process by bringing everyone together in one place, so you don’t have to continually feel like the middleman. Pequity allows everyone to collaborate and execute together and will keep complete documentation for every discussion and decision, so you don’t have to search for documentation in multiple places. 

3. Determine who is eligible 

Not every employee will need adjusted compensation during every compensation cycle. You may not need to consider recent hires or those who have received pay increases recently. So, create a list of employees who are eligible for consideration in this compensation cycle and start there. Then, identify key employees from the list who have the potential to be future leaders or play a critical role in business operations. 

4. Compare to the competition and wider market 

One of the most critical steps of a compensation cycle is benchmarking your company’s compensation against the competition and market averages. In this step, you will consider things like cost of living, employee performance, promotions, transfers and establish if anyone is underpaid. Make sure you are working off the latest data, as salaries and inflation have been increasingly volatile in recent years. You’ll want to have the cost of living and salary data relevant to the current year. 

5. Collect performance reviews 

Make sure to plan in plenty of time for performance reviews as they can be time consuming and can end up delaying your comp cycle timeline if you do not allocate enough time to them. However, you should still set deadlines for these reviews so that it doesn’t delay the process too long (after all, employees are eagerly awaiting your decisions!) 

6. Request and allocate budget

With your finance team, determine what your total budget is for the next compensation cycle. You will need to provide your benchmarking analysis and performance review data to estimate how much budget you will need in this cycle. 

With your budget in mind, allocate your compensation adjustments, merit-based raises, and other adjustments across the company. Then, review the plan with key stakeholders and ensure it is approved. 

7. Communicate with employees 

Finally, once all of your compensation decisions are complete, it’s time to communicate with employees. You should determine the best way to communicate with employees and help them understand why they are compensated a certain way, when changes take effect, and when they will be eligible again for a compensation review. 

Pequity Makes Comp Cycles So Much Easier

Compensation cycles shouldn’t take up all of your time and effort. We can show you how to automate your HR workflows with Pequity, which brings together all of the relevant data in one place, so everyone can collaborate on compensation cycle planning.

Skip spreadsheets and keep everything in one place. Contact us to see how Pequity can work for you.