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Do you want to know what my first experience was when it came to budgeting for the comp cycle?
I got asked by my then HR Manager, to ask around the people in my network, and do some research online, and find out what companies were paying in their review cycle that year.
We didn’t have salary bands.
We didn’t have a pay equity review.
We didn’t get market signals of any kind.
We plucked a number out of (seemingly) thin air. We gave it to finance. They said yes or no. Then that got applied in a simple below - 0% / meets - 3% / exceeds 5% type of arrangement.
The most common thing I came across?
We’d (sort of) budgeted for merit increases, but every year, we hadn’t factored in budgets for promotions. The result: we ended up with pay increases for promotions that took away from those who performed well, but not sufficiently enough that the promotion pay increase was actually rewarding.
We had successfully achieved something that gave people the worst of both words. Uninspiring merit increases and uninspiring promotional increase.
So this episode struck a chord for me, and forced me to reflect on how not to budget for comp cycles.
I sat down with Melissa Theiss to break down something every Head of People has to tackle eventually — budgeting for the compensation cycle.
HR is lonely. It doesn’t have to be.
The best HR advice comes from those in the trenches. That’s what this is: real-world HR insights delivered in a newsletter from Hebba Youssef, a Chief People Officer who’s been there. Practical, real strategies with a dash of humor. Because HR shouldn’t be thankless—and you shouldn’t be alone in it.
It’s not sexy, but it is one of the most strategic and relationship-critical moments in your year.
And Melissa brought the goods — practical advice, clear frameworks, and a strong reminder that you cannot do this well without a tight partnership with finance.
… here’s what we covered:
The five essential compensation buckets you need to budget for
Why you should never rely on one flat raise percentage across the board
How performance cycle frequency should influence your merit allocation
What goes wrong when you forget to carve out budget for market moves
Why retention bonuses are a trap when they steal from high-performer increases
The case for treating finance like your closest business partner
A tip for building goodwill with finance by forecasting hiring timelines more precisely
Why tracking pipeline delays helps unlock cash flow and planning flexibility
My 5 Key Takeaways:
Budget in five clear buckets — merit increases, promotions, market adjustments, international inflation, and signing/retention bonuses — to avoid unplanned tradeoffs. Too often, we set a single compensation pool and then scramble when different priorities compete for the same dollars. Separating the budget into these five distinct categories forces clarity on what we’re actually funding — and what we’re not. It also makes conversations with finance more grounded and transparent, helping you get buy-in where it matters most.
Never assume 100% of employees are eligible for merit increases, especially in semi-annual review cycles. If your performance cycle is twice a year, it doesn’t mean you split the budget 50/50 across both. Hiring patterns, tenure rules, and actual performance distribution all affect eligibility — and overlooking that leads to overpromising or misallocating funds. I’m now thinking more strategically about who qualifies when, and how to align merit spend accordingly.
Market adjustments need to be planned and resourced — not just announced. Companies often forget to allocate specific funds for adjusting pay bands and bringing employees back into range when markets shift. Without that budget, market adjustments silently eat into performance and promotion increases — which can demotivate the very people you’re trying to retain. I’m treating market moves as their own line item, not a last-minute squeeze.
Work closely with finance throughout the year, especially on hiring timelines, to build trust and get better support during comp cycle planning. Melissa’s advice to regularly update your finance partner on actual vs forecasted hire dates was a lightbulb moment. In small orgs, those changes materially affect budget forecasts, and tracking them proactively gives finance more accuracy — and gives you more goodwill when it’s time to ask for flex. It’s a simple but powerful way to strengthen the relationship.
Push for comp cycles to reflect both business strategy and people realities — not just spreadsheets. This means modelling out the impact of limited budget on promotions, retention, and fairness — and having those tough conversations early. If we’re underfunded, managers need to know, and employees need honest communication. I’m walking away with a renewed sense that proactive alignment beats clean-up mode every time.
Got a specific topic you want me to cover or a guest you’d love to nominate? Hit reply to this email and let me know.
Connect with Melissa Theiss
Visit https://kit.com/
Linkedin: @melissatheiss
More FNDN Episodes at Spotify | Apple Podcast
Interested in more? If you missed the earlier episodes with Melissa, Check them out here:
Episode 1: Avoiding Cookie-Cutter Comp with Melissa Theiss, Head of People Ops at Kit & Founder of Fledge: https://youtu.be/xVajo7djvlo
Episode 2: Building a Job Structure that Scales with The Company, Melissa Theiss, Head of Peoples Ops at Kit https://youtu.be/2jxhWnBUt-U
Episode 3: Bonuses: How and When with Melissa Theiss, Head of People Ops at Kit & Founder of Fledge https://youtu.be/e4k3qo5KRE8
That’s all for this week.
Sure, this is technically the end of the newsletter, but we don’t have to end here! I’d love this to be a two-way chat, so let me know what you found helpful, any successes you’re seeing, or any questions you have for me.
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