Compensation Cycle

A compensation cycle is the structured, recurring process organizations use to review, adjust, and communicate employee pay over a defined period. Also called a comp cycle or merit cycle, it covers salary and merit increases, bonuses, promotions, and equity adjustments. It typically runs once or twice a year, often aligned with fiscal-year planning, performance reviews, and budget approval.

Each cycle puts compensation planning into practice, starting with HR and Finance setting the merit increase pool, total compensation budget, and guidelines. Managers then recommend increases, often using a merit matrix that maps performance ratings to increase ranges. Calibration, approvals, employee communication, and payroll updates close the cycle.

For finance teams, the cycle drives a large, recurring share of payroll cost. Merit increases become part of base salary and compound over time, so each cycle raises the cost base for every future budget. That ties the cycle directly to annual budgeting, headcount planning, and longer-range workforce planning.