When it comes to compensation, most organizations have a clearly defined compensation cycle, and any changes or adjustments to employee compensation are made in alignment with that cycle. Compensation cycles are typically annual, said Erika Duncan, cofounder of HR consultancy People On Point. “Many organizations embrace pay for performance and tie an employee’s raise with their annual performance review. Ideally, there is also an annual review of the market and salary demand for titles and skill sets,” she added.
But there are certain situations that warrant making compensation adjustments outside of your organization’s annual compensation cycle. Here’s why you’d need to, and how to handle those off-cycle compensation adjustments without disrupting your company’s budget or overall compensation strategy.
Reasons for Off-Cycle Compensation Adjustments
“Off-cycle [compensation] adjustments can — and should — happen for many reasons,” said Duncan, starting with changes that impact individual employees.
For example, when an employee is promoted to a new position, HR will need to adjust their compensation accordingly. Or, if an employee receives additional educational credentials or certifications (like an MBA or a certificate for completing a professional course), their new skills may merit an increase in compensation. Organizations may also opt to reward top performers with a salary increase or a bonus, and may not want to wait until the employee’s annual review to do so.
In response to the changing economy and labor market, many companies are also rethinking their overall compensation strategy and making off-cycle compensation adjustments as needed. “The change in labor demand and market needs can necessitate a mid-year adjustment due to inflation, lack of talent supply, or the general increase in value of a particular skill set experiencing a shortage,” Duncan explained.
Benefits of Compensation Flexibility
One major benefit of off-cycle compensation adjustments is that they “allow organizations to be nimble and respond more swiftly to market changes,” Duncan noted. If, for instance, your competitors increase the salaries they pay their employees — and you don’t have compensation flexibility and need to wait until the “right” time in your compensation cycle to adjust salary ranges — you might have a hard time attracting and retaining top talent. But if you’re willing and able to make off-cycle compensation changes, you can adjust your organization’s salary ranges to stay competitive.
Another benefit of compensation flexibility is that it can enable your organization to leverage compensation as a way to hit business goals. “[An] advantage [of compensation flexibility] can be the ability to laser focus on a KPI or metric that needs to be addressed,” Duncan said. “Incentives or monetary rewards for impact to profit and metrics is a powerful way to drive business outcomes.”
For example, say you have a big sales goal you’re trying to reach before the end of the year. With compensation flexibility, you can use compensation, such as a larger bonus or a higher commission rate, to incentivize your sales team, therefore increasing the likelihood that you’ll hit your end-of-year target.
Compensation cycles are a useful planning tool, but you don’t want to be too rigid in sticking to those cycles. To maximize your company’s compensation structure, you’ll need to be agile when necessary.
“Annual cycles allow planning and financial predictability, but flexibility is needed to make adjustments in compensation, just like in many other areas of business,” said Duncan. “[Similar to] supply chain adjustments, finance forecasting, [and] quarterly market reports — the same flexibility is needed in compensation.”
How to Effectively Handle Off-Cycle Compensation Adjustments
1. Create a strategy.
Just because you’re making compensation adjustments outside of your company’s defined compensation cycle doesn’t mean you can make those changes without a plan. In order to handle off-cycle compensation adjustments effectively, you need to be strategic.
Before you move forward with any off-cycle compensation adjustments, it’s important to create a strategy that outlines your organization’s approach to these changes. What exactly that strategy includes will depend on your organization, but some key questions to ask yourself when creating your strategy include:
- Under what circumstances will our organization make off-cycle compensation changes?
- What metrics (e.g., performance metrics or industry salary data) will we use to determine if and when employees are entitled to off-cycle compensation changes?
- Who needs to approve off-cycle compensation adjustments? Can an employee’s manager approve an off-cycle salary increase, or does that approval need to come from the department head or other company leadership?
- What is our cap for off-cycle compensation changes? Set a limit, like: Performance-based off-cycle compensation changes may not exceed 10% of the employee’s salary.
- How are we going to communicate policies around off-cycle compensation adjustments to employees?
Having a strategy will provide much-needed clarity around how your organization is going to approach off-cycle compensation adjustments, so make sure to take the time to create one.
2. Be clear in your communication.
When you make off-cycle compensation changes, how you communicate those changes to your workforce is critical. Clear communication will ensure that everyone is aligned about off-cycle compensation adjustments, and can help avoid any confusion down the road. When making off-cycle compensation adjustments, you should clearly communicate how, why, and when compensation is changing.
When you communicate compensation changes clearly and thoroughly, employees know what to expect. If your communication isn’t clear, it could lead to confusion, and, in certain situations, could even have a negative impact on employee morale, engagement, or retention. For instance, if an employee doesn’t understand why they’re getting an off-cycle compensation adjustment, they may assume the same increase will happen the following year, and then feel disappointed when it doesn’t.
3. Use the right tools to manage the process.
When making off-cycle compensation adjustments, another major consideration is the logistics. For example, how do you determine which employees might be eligible for an off-cycle salary bump? What data are you going to use to determine whether you’re going to move forward with off-cycle compensation changes? How are you going to manage communications around off-cycle compensation changes?
That’s where having the appropriate tools comes in. The right compensation tool can help you approach off-cycle compensation adjustments strategically, giving you the data you need to make the right decisions for your organization and your employees, as well as providing the functionality you need to embrace compensation flexibility without any disruption to your operations.
Lattice’s Compensation tool seamlessly integrates performance and compensation data, allowing HR teams to manage the entire compensation review process from one simple, easy-to-navigate hub, whether they’re performing an annual salary review or making off-cycle compensation adjustments. With Lattice, you can also collaborate with managers, directors, and company leadership and set clear compensation guidelines, ensuring clarity, consistency, and transparency when making off-cycle compensation changes. You can even generate employee-centric communications about those changes directly from the platform.
Straying from your company’s defined compensation cycle can feel treacherous, like it’s taking you off a defined path and into murky territory. But as an organization, it’s important to remain flexible and willing to make changes to employee compensation when necessary, and that includes off-cycle compensation changes. These guidelines will bring structure to the process and help you seamlessly manage compensation changes for your employees, no matter where or when those changes fall in your compensation cycle.
For more expert advice about how to handle off-cycle compensation adjustments, particularly in response to the changing economy, watch Lattice’s recent webinar “Building Your Compensation Strategy to Adapt to Uncertainty and Change.”