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Why Don’t We Create a Better ROI for Salary Increases?

February 20, 2018  |   Performance Management,Uncategorized   |     |   Comments Off on Why Don’t We Create a Better ROI for Salary Increases?

Quality_ProductivityAccording to a recent AON/Hewitt survey, even with small merit increase budgets, companies are still trying to spread the shrinking merit increase budgets across all employees. This creates a no-win scenario, as average performers who should be happy to receive an increase are disappointed that it wasn’t more and high performers feel undervalued for their contributions.

From a recent IBM study, one CEO said:
“All of my competitors have access to the same technologies, markets and suppliers that we do. The difference is in whose people use those resources best.”

For a variety of reasons, pay for performance isn’t happening in many organizations, but we want it to.
• Some companies can’t figure out how to do it with small budgets.
• Some companies are reluctant to do it.

Top performers care about pay and expect it to accurately reflect their contributions. Key talent will leave a company if their contributions aren’t properly rewarded.

We know from research that:
• High performers are attracted to organizations that pay for performance and recognize their contributions.
• High performers will leave organizations that do not reward performance.
• Low performers will self-select out of organizations that emphasize high performance in rewards.
• Low performers are more likely to stay with an employer when pay for performance relationships are weaker.

It has been well-established that top performers should get increases that are at least two times those increases received by average performers but they are still only receiving about 1.4 times average performers, which translates to 1.2 percentage points.

From research that has been conducted, the notion of why top performers should receive more in pay than average performers is they deliver greater economic value to the organization. The value difference that has been measured is an above average or top performer delivers $955,000 in real economic value versus $500,000 of an average performer. So, when we look at investing more in base salary to an average performer, we need to think about what return we are receiving on our investment.

We need to improve and optimize our investment in base pay so it’s more effective in retaining top talent.

The value equation gets even more pronounced when we consider that base salaries represent a significant percentage of our Total Compensation Spend.

We need to focus on driving higher merit increase budgets to those positions that are strategic and of higher value and to those who are top performers. We need to move away from the creation of the expectation of an annual increase to focus on changing the cycle of increases to vary increases based on differentiation of skills, competencies and performance. Variable timing allows companies to provide greater increases to those whose performance warrants it.

BCR_ROI Salary Increases_02-2018

The result of changing our approach to base salary increases allows for different increases for different employees. A “meets expectations” performer whose base salary is at par with the market may not receive an increase for eighteen (18) or twenty-four (24) months depending on how they are paid against market.

The challenge is in breaking the entitlement cycle. It creates administrative complexities that require the right HR and systems platform to handle this approach, while paying attention to the impact on discriminatory practices. It also requires the ability to truly measure and differentiate performance.

We need to re-think how we manage pay relative to our pay bands or salary ranges.

BCR Percentile Graph_02-2018

A new approach for Rewarding Performance

BCR_Aon Hewitt Performance
Source: Ken Abosch, Aon Hewitt, The Case for Differentiated Pay For Performance, January 2014

It is pay inequity, not pay inequality that causes negative employee reactions. Pay inequity can result from either unequal pay (with equal contributions) or from equal pay (with unequal contributions).

Source: Trevor, Reilly, Gerhart, Reconsidering Pay Dispersion’s Effect on the Performance of Interdependent Work, Academy of Management Journal, 2012

Ensure whatever design your organization selects is delivered within budget. Model it based on historical compensation practices. Each option depends on your organization’s business, reward strategy, culture, employee perspectives, compensation needs and requirements.  The option your company selects communicates a message to employees and needs to be selected carefully. Your organization needs to consider your organization’s salary increase approach based upon:

• The size of the merit budget;
• The amount of compensation and performance management understanding and training your managers have;
• The amount of flexibility the organization wants managers to have;
• The amount of pay and performance linkage the organizations wants; and,
• The organization’s ability to track, monitor and administer the approach selected.

Contact Us

BCR has a great deal of experience helping companies to improve their compensation programs, salary planning processes and allocation of salary increase budgets.

Written by: Barbary Manny, Consultant

BCR is a local, minority-owned firm with more than 25 years experience in serving non-profit, public, and privately held entities in the key areas of Benefits and Compensation Consulting, Performance Management, Human Resource Organization Development, and Human Resource Information Systems and Processes.

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