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<i>Dear Workforce</i> What Are the Pitfalls of Salary Caps

July 19, 2007
Dear Coping With Caps:

One thing you should know at the outset is that you are facing a common problem. Many organizations struggle with this issue, and the solutions they come up with vary. Let me highlight a few points that I hope will be helpful.
First of all, you did not mention whether the organization already has formal salary ranges (with a minimum and maximum dollar value for each job). If you do not have such ranges, then you should consider implementing them (and communicating the rationale effectively to employees). This can help your workforce understand that every job has a marketplace maximum above which your organization may not be able or willing to pay, no matter how well employees perform in those jobs.
However, having salary ranges will not completely eliminate your problem. The reason is that employees with long tenure eventually will bump up against the maximum. Although employees may understand the concept of each job having a maximum marketplace value, psychologically they may still feel entitled to a salary increase. "What is my motivation to do a good job," they will ask, "if there is no financial reward at the end?"
So an organization has to have a strategy for handling those cases in which individuals reach the maximum of the salary range. Here are two options:
  • Some companies take a hard line by saying that the individual is not eligible for a salary bump until the salary range itself is increased based on market data. Once the salary range is increased, which most organizations do annually, then the individual may once again be eligible for a salary increase, since his/her salary will then be below the maximum.
  • Other organizations provide one-time bonuses to employees in lieu of salary increases. Several organizations I have worked with provide a bonus that is equal to one-half of the amount a salary increase would have been had an individual received it. Their reasoning: A bonus should not equal the amount of a salary increase, as that would defeat the purpose of managing overall costs of employee compensation. In my experience, employee reactions to such schemes have generally been positive.
One word of caution: Whatever you decide to do, it should not be communicated as an action applicable only to your support staff. Even though those positions are the ones that concern you most at present, implementing a policy that focuses on one group of the population might create more problems than it solves. My recommendation is that any actions to treat this problem should be general enough to apply to all employees in your organization.
SOURCE: John D. White, JD White & Associates, McLean, Virginia, July 24, 2006.
LEARN MORE: Please see Four Ways to Lose Your Best People for information on how to retain top-flight employees.
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.