MHRM 6601 Week 8 Compensation Cost Memo Example

Memorandum

To: Chief Financial Officer, Stone Arch Credit Union

From: Compensation Analyst

Date: October 5, 2026

Re: 2027 cost of the pay and benefits recommendations

Bottom Line

At target, the four recommendations plus the regular merit budget cost about $1.16 million in 2027, inside your $1.2 million envelope for pay and benefit increases. At the incentive maximum, the total rises to about $1.45 million, over the envelope by roughly $250,000. Piloting the branch incentive in four branches rather than all twelve in 2027 brings the maximum case to about $1.07 million, inside the envelope in every scenario.

Two Kinds of Cost

Some costs, once granted, become part of next year's base and the year after's: raising pay to a range minimum, a market adjustment or a larger employer share of premiums. Others are paid only if earned and start from zero each year: the incentive. The first kind commits future budgets; the second does not. A dollar of base increase in 2027 is a dollar in every later year, plus whatever raises are later applied to it (Milkovich et al., 2020).

The Costs

Table 1

2027 Cost of the Recommendations

Composite organization. Charges on pay combine employer payroll taxes (7.65 percent) with the retirement match (4 percent).

The Charges Riding on Pay

Every dollar of base pay or incentive also triggers payroll taxes and the retirement match, together about 11.65 percent. These charges are easy to omit when a raise is discussed in round numbers, and they add about $23,000 to the base items and $30,000 to $60,000 to the incentive. Premium contributions carry no such charges.

Testing the Total

At target the total is about $1,163,000. At the incentive maximum it is about $1,454,000. The maximum case is unlikely in the first year, since every branch would have to exceed every target, but a budget should survive its worst plausible case.

The Phasing Change

Pilot the branch incentive in four branches in 2027, as the incentive design already suggested for evaluation purposes. That cuts the incentive's cost to about $97,000 at target and $194,000 at the maximum, including charges. The maximum-case total then falls to about $1,067,000, within the envelope with room to spare. The minimum and market adjustments should not be phased: they address pay below the range and below the market, which employees can see and which drives turnover now. Gerhart and Rynes (2003) note that pay below a declared range invites the strongest sense of unfairness of any pay problem.

Future Years

The three new carry-forward items add about $375,000 to the 2028 base before any new increase. If the pilot succeeds and the incentive expands to all branches in 2028, its target cost returns to about $290,000. That should be planned now, so the 2028 envelope is set with it in view.

What This Memo Does Not Cover

Turnover savings are not counted. Shaw and Gupta (2007) found that how pay is structured shapes which employees choose to leave, not only how many, so better-paid tellers may also mean that the stronger ones stay. If the teller adjustments reduce first-year turnover even modestly, they would offset part of their cost, but that is a forecast, and this memo prices only commitments.

References

Gerhart, B., & Rynes, S. L. (2003). Compensation: Theory, evidence, and strategic implications. Sage.

Milkovich, G. T., Newman, J. M., & Gerhart, B. (2020). Compensation (13th ed.). McGraw-Hill Education.

Shaw, J. D., & Gupta, N. (2007). Pay system characteristics and quit patterns of good, average, and poor performers. Personnel Psychology, 60(4), 903-928. https://doi.org/10.1111/j.1744-6570.2007.00095.x