A formal compensation administration program is the basic management tool for ensuring that employees are satisfied. You can accomplish this in a variety of ways, but at the end of the day the goal is employee attraction, motivation, and retention. Does your compensation administration program utilize merit pay? Automatic increases? Cost-of-living increases? Bonuses? Some combination of these? Something else?
In a BLR bootcamp titled “Comp 101 Bootcamp: How to Effectively Develop Competitive Pay Plans for Your Organization,” Chuck Csizmar outlined several compensation administration options. In this article, we’ll focus on some ways to implement automatic pay increases for your employees.
Compensation Administration: Automatic Pay Increase Pros and Cons
Employees typically have an expectation that their pay will change with time, whether that be based on cost-of-living increases, raises for performance, or through promotions. Some organizations choose to implement performance management systems. Some choose annual bonuses. Some choose to implement cost-of-living raises tied to some external economic index. Others implement an internal raise system tied to profitability.
Of all the types of pay increases to implement, an automatic increase is one of the most straight-forward. Typically there are fewer complexities or barriers to effective implementation. While simple, however, a general increase does have its drawbacks as well, not the least of which is that it is rarely as effective as rewarding employees for their efforts in terms of motivating your highest performers. Another problem with a general increase is that it sets a precedent where everyone expects a raise, irrespective of performance. It’s tough to go back after this expectation has been set. Bear these issues in mind before implementing such a program.
Compensation Administration: Automatic Pay Increase Options
If you choose to utilize automatic increases as part of your overall compensation administration, here are some options:
- Step rates are the most common form of automatic pay rate increases. “You start with a hiring rate, for everyone, for a position where the job rate – or the maximum – is already known.” Csizmar explained. In this scenario, you have a set period of time between each step, usually around 3 to 6 months. Typically, this is implemented as a pass/fail system – either you get the raise, or you are terminated. The raises in this program are often significant. The problem is, once you hit the established “job rate” the raises are less frequent and are often a lower percentage than before – which can be tough to swallow, especially right after you’ve hit the full rate.
- Training rates utilize a pay below the minimum value until you’ve proven yourself. Much like step rates, these are usually implemented as pass/fail in which you either get the raise or get terminated.
- Certification is another means to implement automatic increases. In this scenario, the employer pays one rate for employees before they are certified and a different rate after. The certification may be a diploma or a technical certification or something else. Some employers choose instead to use certifications as stepping stones to promotions rather than automatic pay increases. For example, once an employee receives his or her certification, then they may be permitted to apply to job openings they were previously excluded from.
- Skill-based pay can be used, Csizmar explained, “where an organization is able to break down a particular job into skills or competencies. They may be willing to pay more as you accumulate those skills.” Csizmar told us during the webinar that a classic example is cross-training. If an employee is capable of working multiple positions, that may be worth more pay.
- Annual increases can also be implemented automatically, as opposed to being tied to performance. However, be aware that automatic increases in this format don’t tend to have the motivational effect that performance-based raises do; instead, they become more of an expectation than a motivation.
Because of the motivation (or lack thereof) issue associated with automatic increases, they’re typically used less often than pay-for-performance plans. When evaluating your overall compensation administration program, bear this in mind.
For more information on compensation administration, order the bootcamp recording. To register for a future webinar or bootcamp, visit http://catalog.blr.com/audio.
Chuck Csizmar is a Global Compensation Consultant and the founder and principal of CMC Compensation Group, a professional services provider specializing in analytic, project management, and consultative services for US and international clients.