When it comes to pay increases, nearly every organization has its own strategy. Some give only merit-based pay raises. Others give cost-of-living adjustments every year and tie the amount to an external index, like the consumer price index. Others opt for an annual pay raise that is either automatic or automatic but tied to some goal attainment.
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Here are some examples of ways to implement automatic (or nearly automatic) pay increases:
- Step rates. With step rates, employees are hired at a set rate and given increases at predetermined intervals, such as 3 months and 6 months and 1 year. This continues until the individual is at what is considered to be the full rate of pay for the position.
- Raises with certification. With this type of automatic pay increase, a raise is automatically granted once an individual achieves a required certification for the job. This type of automatic pay increase is usually a one-off or has limited implementation and does not get repeated every year.
- Cost-of-living increase. As noted above, cost-of-living raises are generally tied to an external index, such as the consumer price index. For organizations that implement this type of automatic increase, they may or may not pair the cost-of-living increase with separate merit-based pay changes.
Automatic Pay Increase Pros and Cons
For any organization considering implementing automatic pay increases, there are pros and cons to consider.
Pros:
- For better or for worse, most employees have an expectation that pay will increase over time. By meeting this expectation, an employer can help influence retention rates.
- An automatic pay increase is simpler to administer than a merit-based pay increase because it does not require individual assessments.
- Some employees will see this as a fair means to give everyone raises, taking away claims of favoritism in the process.
- Automatic pay increases can help the organization keep up with market pay rates rather than letting pay stagnate.
Cons:
- Since an automatic increase does not take individual performance into account, it does not act as much of a motivator for employees. It becomes expected and has little impact on performance.
- It can be difficult to change a system in which automatic increases were given. If an employer wants to move away from automatic increases in the future, the employer should expect some resentment from individuals who have come to depend on and expect frequent raises.
- Some employees may see automatic pay raises as unfair, citing that even poor performers get them. This may act as a demotivator.
Pay increases are an important element of an organization’s compensation strategy. After all, pay is a factor in employee morale, motivation, and retention. That said, automatic pay increases are just one option. Employers can utilize this option or, instead, may choose to use merit-based pay increases, skills-based increases, pay-for-performance (in which the individual must meet specific goals to achieve a higher amount of pay), or even profit-based pay raises or bonuses. The organization should assess how raises fit into their overall compensation strategy. They should also assess how raises align with the company values and objectives to determine what method might make the most sense.
*This article does not constitute legal advice. Always consult legal counsel with specific questions.