2016 Resolution #5 – Move From General to Individual Pay Management
Resolution #5 – Eliminate “across the board adjustments” and move to individual adjustments.
Let’s just lay this out on the table – “across the board adjustments,” “general increases,” and “cost-of-living adjustments,” in the absence of a way of compensating for employee growth and performance – are simply a very bad idea. While this may not be the worst possible compensation practice, most of those that are worse violate employment laws.
There are two arguments in favor of the “one size fits all” approach:
1. It’s easy.
2. It’s fair. No, it isn’t. The general increase method is about as unfair as it can be, to both employees and the organization:
- General increases lock employees into the position they were in when they were hired, relative to others performing the same job, and to those in other jobs. No growth, just “maintenance.” Come in when unemployment is high, and you’re paid less forever. Come in when it’s low, and you make more regardless of how you perform. This is demoralizing to employees and a great way to increase disengagement.
- Across-the-board increases virtually guarantee an employer will suffer more pay-related turnover than necessary. It may take as many as 20 years for the pay of an employee receiving a 3% increase every year to actually reach their value in the market — this means that for most of an employee’s career they can earn much more elsewhere.
- The labor market doesn’t work this way. Market rates for jobs move at different rates. Sustained across-the-board increase practices lead to serious pay compression problems, making organizations non-competitive, particularly for higher-value jobs. Note that this is also not fair to the employer, who may not be able to retain better employees, and end up paying much more than necessary for some people.
- New employees hired at “real” market rates are likely to come in earning more than employees who are already working for you. This is a classic problem caused by general increase programs – organizations are left with the option of giving increases to current employees every time they have a new hire, or having high-performing, long-tenured employee earn less than the unproven rookies.
- It frustrates good performers. Why work harder or smarter when you will never even catch up to the slouch next to you, let alone be paid what you’re worth. Compensation programs should be targeted at the best and brightest, not get in the way of retaining them.
- People will find ways around it — another classic problem with general increase employers occurs when employees know that the only way to get paid what they are worth is to quit and come back six months later.
The bottom line is that the only real rationale for this approach is “its easy,” and that’s really sad. It also ends up not being “easy” after all, since organizations are constantly making special (and often random) adjustments to counter the inequities of their pay program, or scrambling to cope with unnecessary turnover.
It isn’t difficult to measure performance, nor is it difficult to ensure that employees are paid based on their contributions. Organizations get into trouble when they try to get too fancy, or when they don’t understand that performance management is simply developing people to the expectations of their jobs. The best performance appraisal form is a copy of the job description with enough room to write in the margins, and it with that method it doesn’t require a lot of work to figure out how close each employee is to “full market value.” The best compensation program achieves one simple thing — it ensures that employees are always paid what they are worth.