Square Peg in a Round Hole: Balancing the Global Salary Budget

Author:
Warren Heaps – Birches Group LLC

Managing salary budgets on a global basis is a real challenge.  In some companies, the process is often dictated by the corporate finance department, which establishes the amount of growth in the budget “salary line” which is acceptable for the following budget year, say 3%.  That’s 3% in the currency used for budgeting, usually the headquarters country currency.

So how do compensation professionals make the global salary budget “come in at 3%?”  It’s kind of like fitting a square peg in a round hole.


Square Peg in a Round Hole

Understanding the Realities
First of all, accept the reality that once finance establishes the rate, it probably won’t change.  There is no point to argue that it’s not enough, or it’s unrealistic for the countries you are managing, because corporate is viewing this on a global basis, and when all the countries are rolled up, 3% is still going to be the number.  But you can manage your countries more strategically by following these simple steps.

Simple Steps to Manage Salary Increase Budgets

  1. Calculate how much money is available across all of the countries you manage.  If it’s 3% in dollars, apply that percentage to the proper figure in each country, and add them all up.  This is the amount that you need to match to in the end.
  2. Before you allocate budget money for increases, you need to first understand where you stand versus the market.  The best way to do this is to compare your data to one or more market surveys.  In doing the comparison, you need to keep in mind the compensation policy that has been established, which will define the market reference to which you should compare (e.g., comparators, percentiles, pay mix, etc.).  Compare your salary scales to the desired market position.  How much would it cost to move your midpoints to match the market?
  3. Next, determine the compa-ratio.  I suggest, if you have salary scales defined, that a calculation of actual pay divided by internal salary range midpoint is the way to go.  If no scales are defined, use the target market position from your market data instead.  Summarize the individual compa-ratios.  Be careful about using averages, since they often hide important anomalies.  A weighted average by grade is a good way to identify if you have problems with specific groups of staff.  If you notice extreme outliers, toss them out of the mix.

Now you have the information you need to do an allocation.  To illustrate, let’s suppose that you are managing three country budgets.  The three country operations are different in size, have different overall compa-ratios, and exist in three distinct country markets each of which experienced market movement, in their local currency, at different percentages.  The table below summarizes the information for the three countries:

Country 1

Country 2

Country 3

Total

Total Salary (local currency)

      198,800,000

         12,500,000

   3,700,000,000

Number of Staff

400

250

100

Average compa-ratio vs midpoints

98.9

103.5

96.3

Average compa-ratio vs market

93.5

99.6

91.4

Market movement

7.5%

2.1%

11.8%

Amount to match midpoints to market

         12,922,000

                 50,000

      318,200,000

Amount to move compa-ratio to 100

           2,186,800

                          -

      136,900,000

Total needed to match the market

         15,108,800

                 50,000

      455,100,000

Exchange rate (LC:1HQ)

14.2

0.9

1850

Equivalent amount in HQ currency

           1,064,000

                 55,556

              246,000

           1,365,556

Headquarters Budget Amount (@3%)

              420,000

              416,667

                 60,000

              896,667

As you can see, using the 3% figure in headquarters currency, the combined amount available for pay increases is 896,667.  If each country moves their salary scale midpoints to match the market, and increases pay for staff to get an overall compa-ratio of 100 versus the new scale, 1,365,556 is required, well over the 3% threshold.

Now the fun starts.  You need to tweak the numbers to get within your budgetary limits.  This can be accomplished by reducing the scale match to market to a bit less than 100, and/or, not moving to an overall compa-ratio of 100, but instead, settling on something a bit less.  Since the dynamics of each market are different, as well as the company’s market position and compa-ratio, you need to look at each country separately and allow for different solutions in each.

In my experience, you will probably want to keep your salary scales in line with the market as best you can, pretty close to fully comparable.  In the exercise above, this is the lower cost part of the equation.  In determining how much to allocate for increases to move employees within the range, you need to consider market movement as well as employee expectations, which are usually driven by inflation (for a good explanation of why cost of labor is more important than cost of living, see my post here on that subject). In the end, though, the budget constraint will force your hand a bit.

Handling budget allocations is never easy, especially when the answer is provided in advance from headquarters.  But thinking about it one country at a time, as well as in groups of countries, will allow you to allocate slightly different amounts in each country while still meeting the overall goal for your budget.

Please share your experience in managing pay increases across the globe.