By Claudine Kapel
When it comes to awarding base pay increases, it helps to have some ground rules to ensure decisions are fair and consistent.
These ground rules are typically captured in pay administration guidelines or policies used by the human resources team as well as any leaders involved in making pay decisions. Having formally documented guidelines helps keep everyone on the same page when it comes to managing compensation.
Some of the subjects that are commonly addressed in pay administration guidelines include:
- The considerations when determining base pay increases, including how the organization seeks to connect pay and performance, as applicable.
- Managing increases for employees who have reached the maximum of their salary range.
- Managing promotional increases.
The WorldatWork’s 2013-2014 Salary Budget Survey offers some helpful insights into market trends around these types of issues. The global survey covers responses from 4,620 participants although the pay administration practices reflect the U.S. sample only.
Organizations that link pay and performance generally seek to differentiate merit increases based on performance categories, although other considerations (such as position in range) may also apply.
The WorldatWork survey results illustrate this performance-based differentiation based on merit increases paid out for 2012:
- High performers received an average increase of 3.9 per cent and the median award value was four per cent.
- Middle performers received an average increase of 2.7 per cent and the median award value was also 2.7 per cent.
- Low performers received an average increase of 0.6 per cent and the median award value was 0 per cent
Typically, organizations manage to a pay increase budget, so it’s not surprising the survey results show that the average and median 2012 merit increase awards for high performers were lower when the population of high performers was larger.
For example, organizations reporting that up to 10 per cent of employees were rated as high performers provided this group with an average merit award of 4.6 per cent and a median award of 4.5 per cent. In contrast, organizations reporting that 30 per cent or more of employees were rated as high performers provided this group with an average merit award of 3.8 per cent and a median award of 3.7 per cent.
When it comes to containing fixed compensation costs, many organizations provide lump sum merit awards to employees who have reached or exceeded their salary range maximums.
The WorldatWork survey found the use of lump sum awards to be fairly prevalent. The reasons cited for using lump-sum awards included to address budget constraints, to manage the pay of employees at or above their salary range maximum, and to give an employee more buying power at a specific point in time.
- 56 per cent give lump-sum awards to salaried (exempt) employees.
- 39 per cent give lump-sum awards to officers / executives.
- 50 per cent give lump-sum awards to hourly non-union employees.
Finally, a common pay administration issue relates to how costs associated with promotional increases are funded. Some 46 per cent of respondents reported they establish a budget for promotional increases.
Among respondents that don’t budget promotional increases, 64 per cent reported promotional increases are funded with savings, such as those arising from vacant positions or from hiring new employees at a lower rate than previous incumbents. Meanwhile, 27 per cent indicated they fund promotional increases out of their budget for merit increases.
Day-to-day compensation management encompasses a variety of decision points and scenarios. Taking the time to work through the optimal responses will make the process easier and more consistent, and will also contribute to the credibility and perceived fairness of the compensation programs themselves.
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.