How to Manage a Compensation Cycle: 7 Steps

Manage Compensation Cycle

A compensation cycle allows your organization to continue offering competitive wages and rewards to your employees, which helps with retention. But this cycle can be daunting to any team that doesn’t have a well-defined process. In this blog, we look at how to manage a compensation cycle in seven steps.

In today’s job market, it’s challenging for organizations to retain the right talent. With more than 4 million American workers leaving their jobs every month since the start of 2022 and 40% of American workers thinking about quitting their jobs, it’s more important than ever for organizations to find ways to keep their employees. One way is through managing an effective compensation cycle.

What is a Compensation Cycle?

A compensation cycle is a process of determining how much you should pay employees. It involves reviewing and benchmarking internal employee compensation – base salary, wages, bonuses, commission, overtime, etc. – against company objectives and the external market.

The goal of a compensation cycle is to ensure employees get fair compensation based on their job duties, skills, performance and experience. This is essential to employee retention because 63% of workers who quit their jobs in 2021 cited low pay as one of the main reasons. That’s why most companies review their compensation cycle every six months to ensure their compensation remains competitive.

But how do you successfully manage a compensation cycle? Follow these seven steps.

7 Steps for Managing the Compensation Cycle

Step 1: Gather Your Team

The first step is the most straightforward: Gather your team. This should include key stakeholders from various departments, including:

  • HR
  • IT
  • Payroll
  • Finance

If your compensation cycle lasts six months, meet at the beginning of the year and in the summer. That gives you time to see what is working well and what could use improvement. It also allows you to stay current on the recent market trends and adjust employee compensation for the next cycle accordingly.

Step 2: Review Your Process and Goals

Before you start working on the upcoming compensation cycle, review the last one. That way, you can evaluate the existing process and see what you need to adjust for future cycles. You should also look at your company goals and see if the current approach aligns with them.

For example, if one of your goals was to allocate more pay to high performers and high potential employees, look at how much was spent during the last cycle. Did you meet your goal? Miss it? If you surpassed your goal, what adjustments can you make during the next cycle? Make the appropriate changes to your process to set yourself up for success.

Step 3: Identify Who is Eligible

Now’s the fun part: deciding who is eligible for an increase in total compensation. Unfortunately, not everyone will be eligible for a pay increase or reward every cycle. For example, those who have recently joined the organization or received a pay increase may be ruled out. Therefore, it’s a good idea to sort your employees by those who are eligible and ineligible so you can narrow your focus for the remaining steps. If changes in eligibility rules are being considered, model the effects of the changes before implementing them.

Step 4: Compare Your Plan Against the Market

Benchmarking is perhaps the most important step of the compensation cycle because it allows you to compare your total compensation package against the market. This allows you to see how your organization compares to other companies when it comes to compensating your employees and determine if you need to make changes to remain competitive.

Here are some factors to consider when benchmarking:

Ensure you have the most up-to-date data to make real-time adjustments to your employees’ compensation. Since many of these employees won’t see a wage increase or reward until a year from now, you want to ensure you compensate them fairly and competitively so they won’t be looking for a new job soon.

Step 5: Determine the Budget

Work with your CFO and finance department to establish a budget for the upcoming compensation cycle. Consider various factors when determining the budget:

  • Benchmark analysis data
  • Business results
  • Performance reviews
  • Plan guidelines
  • Salary cap limits

This step is easier to complete when you have a single compensation management system because you have all the data and information at your fingertips without digging through spreadsheets.

And when you need budget allocation approval from key stakeholders, you can simply send them a link to the compensation system, where they can sign off and automatically pass it along to the next person in the chain. This helps to reduce human error and keep the approval process moving along so that employees can get their compensation at the right time.

Step 6: Communicate With Employees

Lastly, it’s time to communicate the raises and rewards with your employees. With so many workers across your organization, you need a system in place that can publish employee statements at the right time for each employee. Ideally, your compensation management software has the functionality to keep all of your employees’ reviews, feedback and compensation information all in one place.

Step 7: Consider Compensation Management Software

After all of your eligible employees have received their compensation, celebrate with your team and prepare for the next cycle. This includes reviewing your compensation management software.

The ideal compensation management software empowers you to define, oversee and control the entire compensation cycle. This includes everything from budget modeling to award allocations. Plus, it allows you to easily and clearly communicate your decisions to employees so they know their compensation is justified. If your existing system doesn’t allow for these functions, look into upgrading to a new platform before the next compensation cycle.


Your organization’s compensation cycle helps to ensure your employee compensation and rewards remain competitive in the marketplace. This helps boost retention by making your employees feel valued.

HRSoft’s COMPview Software makes the compensation cycle simple. This award-winning compensation management solution anticipates and manages multiple variables exactly to your specific needs. Contact us to learn more.