Pay increases are an important part of a compensation system as they aim to reward employees based on their performance achievements, but your organization should make sure you follow these four important guidelines when administering pay increases.
1. Base pay increases on your performance management and goal setting processes.
Pay increase practices should be aligned with not only your organizational culture and best practices for your organizational size and industry, but they also should align with your organization's performance management and goal setting processes to make sure that variations in employee performance are measured accurately and fairly rewarded.
In order to do this, a well-established and quality performance management system must be in place as you will need to determine what performance levels constitute average and outstanding performance, and what level of pay increase should be awarded given the performance level.
Similarly, if goal setting is used, you need to decide whether meeting goals and objectives should earn an average increase or above average increase, whether exceeding goals and objectives should earn an above-average increase, and so on.
These decisions should be made with your senior management team, and tools should be provided to managers to help them rate employees and determine increases. Typically, a chart of ratings with corresponding pay increase ranges (commonly referred to as a merit matrix) is developed to help guide the rating and pay increase process.
2. Differentiate levels of pay increases.
Differentiation of raises continues to be common particularly in for-profit organizations, but in general, companies seem to differentiate raises conservatively, typically with about a 2% difference between top, average, and bottom levels of performance. A simple approach of differentiating raises by 3-5 levels is common. For example, a rating of above average or satisfactory performance would result in a higher merit increase, while a rating of below average or satisfactory performance would result in a lower merit increase.
Organizations seeking to provide larger rewards to top performers can certainly differentiate increases more, however, this tends to be a riskier compensation decision that many organizations do not make. It may be a wise decision, however, to better reward high performing talent.
Some organizations continue to pay across the board and cost-of-living increases, particularly non-profit organizations, however, there continues to be a gradual move towards performance-based compensation in this sector.
3. Communicate pay increase decisions.
Communicating pay increases requires openness and transparency. Employees should understand the pay system, the organization's philosophy to award pay increases based on performance, and how pay increases are determined—such as through achieving certain performance ratings or clear goals and objectives.
Communicating the reasons why employees are receiving the increase and making sure that top performers understand that they receive a differentiated and higher increase are especially important in communicating increases.
Because increases for top performers tend to have only modest differentiation in practice, the message sent to top performers in communicating pay increases is especially crucial.
4. If you can pay increases, provide them.
With health care costs rising and other economic factors influencing employers' ability to provide regular and pay increases, the question often emerges as to whether or not to provide pay increases among organizations.
It's always a good practice to provide increases when you are able, and ideally, every year. Regular pay increases not only help keep employees' pay at market, but they are important in retaining employees—especially your best ones.
Compensation frequently emerges as a driver of retention in our research, and when pay increases aren't provided regularly, it affects job satisfaction.
Although pay increase budgets tend to be tighter now than they have in past years, it continues to be important for organizations to make investments in staff raises, base those increases on important company factors like performance management and goal setting, differentiate increases based on performance, and effectively communicate pay increase decisions. Pay increases are an invaluable reward for your workforce.
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