The salary-increase plan that gets results
October 15, 2008 by Jim GiulianoPosted in: In this week's e-newsletter, Incentives, Latest News & Views, Money, Pay and benefits, Retention and turnover
When it’s time for a raise, most companies handle the event in pretty much the same way — the wrong way.
Compensation specialists refer to the common approach at the “peanut butter plan” because it’s aimed at spreading raise money thinly and evenly.
Here’s how it typically works:
- A manager gets a lump-sum amount to apportion to employees for raises. The amount usually breaks down to be 3%-4% of total salary.
- The manager then awards top performers raises of 4%-5% and low performers 2%-3%.
- And everyone ends up happy, right? Wrong.
According to research by SuccessFactors.com, under that scheme, companies tend to retain low performers — who are happy with almost any raise — and lose high performers, who go elsewhere for raises that typically amount to at least 10%.
And that’s not all. The research shows companies that use the peanut-butter approach — thin spreads between high and low performers — tend to be less successful than those that have wider raise spreads. In the test of 41 companies, those that had wider spreads experienced better revenue growth (33.85% more) and net income growth (8.5% more).
The conclusion: The bigger the in raises between high and low performers, the better the company.
Tags: compensation, raises, salary, SuccessFactors
October 20th, 2008 at 2:27 pm
What’s the best way to give a performance review that will not have any monetary increase?
October 20th, 2008 at 3:25 pm
What happens when employees get a satisfactory or above on their perfomance plan, but do not get a raise for 5 months or more and they don’t retro pay?
October 20th, 2008 at 3:34 pm
Most managers abdicate the review process so that’s why they have problems
October 20th, 2008 at 4:27 pm
There is nothing in stone that requires pay increases to anyone anywhere. Pay increases are often used to communicate value to employees. Some managers give everyone an increase, some smaller percentages than others. Some give only top performers increases hoping to motivate the under achievers. I have found, that for me personally, a standard increase for cost of living – 2% to 3% works – then award performance via quarterly or annual bonuses. For others it is the salary that matters. I don’t think there is one proven way to make all employees happy. But companies can send the “way to go” message via bonuses and those that don’t get bonuses will ldo a better job or look elsewhere for employment.
October 20th, 2008 at 4:41 pm
The best way to give performance reviews and not attach any monetary reward to them, is to not call them performance reviews, and do them more frequently. Put in a coaching program, and prepare 90-day plans. These are easier for everyone to work on and discuss more formally.
Also, set the expectation up front, that annual increases are not customary, and explain what your process is. If employees know this up front, they will not be caught off guard when review time comes along!
Aside from that, why wouldn’t you want to give annual increases to employees who have done an outstanding job?
October 21st, 2008 at 10:23 am
I believe it is best not to combine performance reviews and monetary rewards. I think it is best to conduct performance reviews at a minimum of every six months. You should also coach them between the performance reviews so that they are not suprised when it is time for their performance review. If monetary rewards are given at a paticular time every year I would just make sure not to conduct performance reviews at the same time, this way a raise will not be expected.
October 23rd, 2008 at 10:11 pm
If you don’t connect performance with monetary rewards, then what is the motivation to perform at the highest level possible?
December 8th, 2008 at 11:45 am
We are a small 30 employee technology products company. We have separated Performance Review from compensation adjustment. The reviews are done by the reporting manager and turned in to HR. HR handles the annual adjustment based upon a per-set % on various performance rating. Managers are not told what is the raise table or the exact raise/pay for specific employee. It is because the employee may have higher pay or higher raise than the manager and it eliminates the manager to “boost” up the rating so the employee will get more money. The annual raise for the past 5 years is average at 5.7% on the payroll pool but individual may get anywhere from 0% to 12.5%.
We typically use market rate for reference instead of the living index. The HR may also recommend stock options when there are high performer whose salary is already at max or in the 95% of market. Executives are typically do not get annual raise. The annual cash bonus is totally not tied to salary base. Neither sales(who are already compensated with sales incentives) or executives are not entitled to the bonus pool.