By Claudine Kapel
It’s performance review time for many companies, when a young manager’s fancy turns to allocating salary increases to deserving staff.
But trying to link pay and performance through merit increases may represent an ode to Shakespeare: a deed full of sound and fury, but signifying very little.
A major challenge is that there is often little difference between the salary increases awarded to top performers and those given to average performers.
A recent survey by Sibson Consulting, for example, found that 57 per cent of respondents provided high performers with 1 – 2 per cent more in salary increases compared to average performers. An additional 26 per cent said they gave top performers increases that were 3 per cent higher or more, while 12 per cent indicated they gave all employees the same percentage increase regardless of performance. (The final 5 per cent reported that they didn’t even know if they differentiated pay based on performance).
The bottom line is that organizations shouldn’t rely on salary increases as the central means for reinforcing desired performance and results.
For starters, salary increases are typically awarded annually. And in recent years, budgets for salary increases have ranged from modest to non-existent.
So if your managers typically wait for that once-a-year event to communicate that they value their people, you may be heading for a lot of unwanted turnover.
Of course, employees do place some value on getting their annual increase. But the positive sentiment generated by such awards is typically short lived – especially when they’re translated into after-tax dollars.
That’s one of the reasons that incentive pay has become more common. When specified objectives are achieved, incentive plans generally deliver bigger payouts than merit increases. So they can typically deliver more meaningful links between pay and performance than base pay programs. Further, unlike salary increases, incentive awards don’t drive up fixed costs.
You can also increase the return on investment of the annual salary review by putting more emphasis on the year-round performance management process, including feedback, coaching, attention to development needs, and recognition. It’s through ongoing dialogue, including acknowledging a job well done, that managers can really inspire employees to deliver their very best.
Claudine Kapel is principal of Kapel and Associates Inc., a Toronto-based human resources and communications consulting firm specializing in the design and implementation of compensation and total rewards programs. For more information, visit www.kapelandassociates.com.