As city managers prepare for the upcoming 2025/2026 budget cycle, compensation planning requires careful consideration of economic trends, labor market dynamics, and long-term fiscal sustainability. This post outlines key strategies for developing a compensation framework that balances employee retention with fiscal responsibility.
Economic Context Assessment
Begin by analyzing current economic indicators that will impact your compensation planning:
- Inflation rates have moderated from their 2022-2023 peaks but remain a consideration
- Regional unemployment rates and their impact on talent acquisition
- Local cost of living changes specific to your municipality
- Wage growth trends in both public and private sectors
This economic context provides the foundation for realistic compensation adjustments that reflect both market realities and budget constraints.
Comprehensive Market Analysis
Conduct a thorough salary survey comparing your compensation packages with:
- Similar-sized municipalities in your region
- Private sector equivalents for transferable positions
- State and federal positions with comparable responsibilities
Pay particular attention to positions with high turnover or recruitment difficulties. Consider total compensation value, not just base salary, including healthcare costs, retirement contributions, and other benefits.
Strategic Budget Allocation
Develop a tiered approach to compensation adjustments:
- Critical retention positions – Roles with high turnover costs or specialized skills may require targeted increases
- Market adjustment positions – Jobs significantly below market rates need phased adjustments
- Standard progression positions – Positions aligned with market rates can receive cost-of-living adjustments
This targeted approach allows for strategic allocation of limited resources while addressing key retention concerns.
Long-term Fiscal Sustainability
Balance immediate compensation needs with long-term fiscal responsibility:
- Model the multi-year impact of compensation changes on overall budget
- Consider the effect on pension obligations and other post-employment benefits
- Develop contingency plans for economic downturns
- Establish clear metrics for evaluating the effectiveness of compensation adjustments
Employee Engagement and Communication
Involve stakeholders throughout the planning process:
- Conduct focus groups with department heads to identify critical positions
- Survey employees about compensation priorities and concerns
- Engage with union representatives early in the process
- Develop clear communication materials explaining compensation decisions
Transparent communication about the factors driving compensation decisions helps build trust and understanding among employees.
Implementation Timeline
Create a phased implementation plan:
- Begin data collection and analysis at least 6 months before budget finalization
- Present preliminary findings to leadership team 4 months before budget approval
- Finalize compensation strategy 3 months before budget submission
- Develop detailed communication materials for employees and the public
Conclusion
Effective compensation planning for the 2025/2026 budget cycle requires balancing market competitiveness with fiscal responsibility. By taking a data-driven, strategic approach to compensation, city managers can address retention concerns while maintaining sustainable municipal finances. The most successful compensation plans will be those that align with both organizational values and economic realities.
If you want to learn about how City Compensation can jump-start compensation planning for 2026, email us at sales@publicsectortalentanalytics.com. Our nationwide analytics solution is used by local government across the United States to quickly and effectively set compensation strategies.