In a previous post, we discussed the precarious situations many employers find themselves in when it comes to employee pay increases. We currently find ourselves in a tight labor market with relatively low unemployment, and employees consistently list financial compensation as one of the primary factors in accepting and staying at a job.
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At the same time, companies may not be able to consistently increase revenue at the level needed to fund pay increases year after year sufficiently enough to satisfy all employees.
But is it really necessary to satisfy all employees? Here we make the case for implementing a relatively more hierarchical pay increase structure. By that, we mean directly providing pay increases to top performers while giving poor or average performers little to no increase.
Here we take a look at what some of the benefits may be to that approach.
Retaining Top Talent
In our previous post, we noted that financial compensation is a key factor in employee decisions on where to work. A modest raise may not be sufficient to retain your best talent; however, focusing your financial resources on top talent may be enough to retain your very best employees. In a labor market that is highly competitive, especially for niche or hard-to-fill positions, this approach makes good sense.
Financial
A hierarchical raise structure allows companies to spend money to keep top talent while still keeping their overall payroll costs within reasonable limits. Even if you’re giving a few employees 10% or greater raises, you can still keep your average pay increase to 2% or 3%, for example.
Performance Incentive
While some employees might grumble at receiving little or no raise while others are getting big pay increases, the fact is that when implemented transparently (in terms of factors impacting the size of a raise, not specific employee raises) and fairly, a hierarchical pay raise system incentivizes employee performance.
If everyone in the company is getting roughly the same raise each year, there’s less incentive to work harder and less disincentive for slacking off.
We’ve discussed the need for employers to make sound financial decisions when it comes to employee raises, as well as some arguments in favor of a more hierarchical incentive structure. In a follow-up post, we’ll discuss the basic how-tos of instituting such a system.