Dear Questioning Sanity:
I am a firm believer in a pay-for-performance philosophy. That being said, most merit-increase programs fail to provide the level of differentiation needed to motivate employees. For example, you would need at least a 3 percent to 4 percent difference in the amount of increase received by your top performers vs. employees who merely meet expectations. Realistically, employees aren’t going to be motivated by less than that. But most companies with merit systems use only about a 2 percent average differential—which is insufficient.
Managers complain that merit discussions are painful and distracting. The problem gets worse if salary and wage structures are frozen or only sporadically adjusted. Employees who reach their maximum pay range may get minimal increases or none at all. Some companies provide lump sums (a one-time payment in lieu of a salary increase), but we find that these are no substitute for increased pay.
However, the reverse case is no more pleasant. Providing the same increase, or percentage increase, to all employees actually may de-motivate your high-performing employees. Many companies use step rates (automatic increases) to compensate employees for more experience, more time or better performance on the job. Wages are maxed out once employees reach the cap. Unless rates are adjusted upward annually, employees with longer service may wait years for their next increase.
Needless to say, this can lead to serious employee-relations problems. In addition, calling this general bump in wages a cost-of-living increase can create some definite headaches. First of all, cost of living is a very arbitrary number. Few agree on how to calculate it, much less how to apply it to any one individual. There is no such thing as a standard cost-of-living figure for a particular employee. The term, and whatever number you decide on, will be open to debate.
Fixed or general increases are used with great effectiveness by companies whose cultures emphasize teamwork. Even so, most companies adopt general increases for other reasons. Typically, they want to avoid the underlying issues around merit and simply provide the same increases to everyone. If your company decides to go that route, be sure to position it as an adjustment to meet competitive labor costs, not cost of living.
One final note: we recognize that some companies can absorb wage increases, while others are plagued by narrow margins and squeezed by both customers and suppliers. The best-performing companies involve their employees in developing solutions. Not surprisingly, these companies experience fewer issues relating to employee morale and unionization.
One option to seriously consider is an incentive plan, such as gain sharing, to help drive greater productivity and efficiency. Gain sharing is a lot like profit sharing, but it’s usually based on things like productivity or efficiency rather than profit. It may be a while before such plans take hold in your culture, but when combined with continual improvement efforts, they provide effective support for a company’s business strategy and culture.
SOURCE: Bob Fulton, managing director,The Chatfield Group, Glenview, Illinois, September 20, 2004.
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The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.