Employee compensation administration is changing, and the demand for talent is exploding. In response, companies may be dusting off old salary administration practices. Why the change?
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Between 2008 and 2017, average annual inflation has been 1.45%, while average nonmanagement pay increases were 2.8%. Over that 9-year period, corporate after-tax profits rose 237%, averaging 12.9% per year. Today, national unemployment is hovering around 4%, an 18-year low.
Employees recognize that they must become more proactive in their career management, often by looking for opportunities elsewhere. Growth-oriented companies are recognizing this as an opportunity to attract top talent.
Nice and Even
Over the past 9 years, the typical salary increase budget has been less than 3%. Many companies granted no salary increases at all. Most companies granted across-the-board increases with minimal differentiation based on performance, spreading pay increases evenly over the workforce, which I refer to as the “peanut butter” approach. That worked while employees were held captive by the economy, but times are changing.
That isn’t the best way to administer pay. Egalitarian salary administration falls short when it comes to recognizing and rewarding performance. An effective pay-for-performance scheme involves performance management and salary administration. Both must be done well to be useful.
By the Calendar
To optimize performance-based salary administration, we have two variables at our disposal: the timing of the increase and the amount. Today, most organizations ignore timing, although companies once awarded increases on an other-than-annual basis.
It’s motivating when an employee receives an unexpected salary increase in 6 or 9 months because his performance exceeds expectations. Somewhere along the way, management has abandoned this flexibility. Pay increases occur annually, often on a common date. The approach is probably due more to administrative convenience than motivational theory.
Just a Little, More or Less
The second variable is the amount of the salary increase. Today, 97% of nonmanagement employees receive pay increases; 87% will receive +/- 1% of the average raise. Seven percent will receive a little more, while a few will receive less.
The differential in pay increase between median and superior performers isn’t enough to motivate employees to continually perform up to their potential. To truly have an impact on performance, the differential between an outstanding performer and a median performer should be twice as much or more. If the median increase is 3%, top performers should receive 5% to 7%.
In the past, companies have used a merit increase matrix that includes both timing and amount as variables, along with salary ranges that are anchored to pay for comparable jobs in the marketplace. If an outstanding performer is paid low in her salary range (below market), she should receive increases more quickly and at a higher percentage until her pay matches the appropriate pay position in the salary range.
The lower third of the range is the proper place for new employees who are still learning the job or for employees who struggle to meet performance expectations. The middle third is for those who consistently perform commendably. The upper third of the range is reserved for employees who consistently perform in an exemplary way.
In the lower third of the range, if someone is new but demonstrates a desire to learn, he should receive a raise. If the employee isn’t learning or performing, he shouldn’t receive an increase. Performance, pay position in range, percentage of increase, and timing—considered together—can have a significant impact on pay progression.
Bottom Line
For readers who have worked in salary administration for a while, this might be a flashback. For others, it may spark awareness of an additional variable that you have at your disposal as you look for ways to ignite your workforce.
| Joel Myers is a management consultant with F&H Solutions Group. He can be reached at jmyers@fhsolutionsgroup.com or 901-291-1576 |