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Dear Workforce How Do We Move Away from Across-the-Board Salary Increases and Instead Tie Them Back to Performance

As a nonprofit, we live and die by our budget. Recently, after freezing wages for two straight years, we managed to squeeze out a 3 percent increase for all employees. The fact that many people have waited so long for an increase made it difficult to slice and dice the relatively small amount of allocated dollars. Still, some employees are grumbling that flat increases aren’t fair. How do we get away from across-the-board increases and tie them back to performance, especially when dollars are scarce?
June 30, 2005
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Related Topics: Variable Pay, Compensation Design and Communication, Dear Workforce, Compensation
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Dear Natives:

The best way to respond to those who believe their contributions aren't being recognized is to identify the increase for what it is. Call it a cost-of-wages increase (not cost of living). In any event, refrain from calling it a merit increase or linking it to performance. Communicating this difference is critical, especially given your desire to build a performance-oriented culture.
Assuming that your budget remains slim, two options exist to link raises with performance. First, you could make distinctions so that top performers receive more of the allocated dollars. If you choose this course, however, take care when doing the math. Calculate several scenarios, using the real salaries of employees, to fully understand the dollars-and-cents implications. Will your star performers see a substantial difference in their paychecks between a 2.5 percent and a 3 percent raise? If the answer is no, increase the pay differential.
Making these distinctions credible depends in part on the quality of your performance-management process. Consider other forms of rewards (additional vacation days, for example) besides merit increases. Articulate the reasons for the different rewards: they are used to recognize (and inspire) excellent performance.
A second approach is to divide your available dollars only between your highest performers. Don't give raises to those who merely meet expectations. You will need to weigh the risks of actually losing some of your poorest performers, who may go elsewhere as a result of this strategy. This is not necessarily a bad outcome. This approach enables you to reward your high performers in a more meaningful fashion.
Whichever option you choose, remember to be fair and objective and to communicate with your workforce. Let your people know in advance how money is being allocated. In other words, make performance measurement a transparent process so your people:
  • Understand what is expected of them
  • Know how and by whom their contributions are assessed
  • Recognize that rewards are based on objective criteria.
SOURCE: Randolph Harrison, senior principal,Capital H Group, Chicago, August 2, 2004.
LEARN MORE:Four Ways to Lose Your Best People.
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.
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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.

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