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.
