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Splitting Increases – a Sound Principle for Salary Increases


2020/02/18 03:03:03 PM

Salary Increases

 

Often during increase time we are so busy with everything that surrounds increases that we forget to consider the why and how of increases. Here are some points for reflection to consider and to ensure we allow for enough planning and structure during this important time.

 

1. Inflationary Increases:

The purpose of an annual inflationary increase is to maintain the “buying power” of an employee’s annual package. In real terms, an inflationary increase enables people to buy the same amount of goods with their earnings as in the prior year. The Consumer Price Index (CPI) is normally used as a benchmark to determine the increase percentage.  

Although employers are not compelled by law to give inflationary increases, it is common practice to do so. There are however a few pre-requisites:

  • The employer must be able to afford it. If a business is struggling to break even, it is often not possible to give inflationary increases. Note however that the opposite does not necessarily apply – if a business is very profitable, that will not necessarily result in above inflation increases. This is a discretionary matter left to the employer.
  • The employee must have done a reasonable job. Employees are paid to do a specific job. If they don’t meet their end of the bargain, they can’t expect an inflationary increase just because it is common business practice. Inflationary increases are often “held back” as an incentive to get underperforming employees to perform. If the employee’s performance improves satisfactorily the increase can be given a few months later.

 

2. Other Increases:

Reasons for other increases could be any of the following:

  • Rewarding exceptional performance
  • Increased responsibility
  • Promotions
  • Aligning with market related rates
  • Aligning with salary brackets for specific job grades

It is important to separate other increases from inflationary increases. Employers are often tempted to “blend” inflationary and other increases together – sometimes to save costs. It creates confusion amongst employees if they don’t clearly understand the reasons why they receive the increase they did.

A practical way to split Other increases from Inflationary increases, is to do them in different months. Some increase e.g. Promotions are given on an ad hoc basis, at the time of the promotion.

 

3. Communication and Timing:

Salary and wage increases is one of the most debated topics in businesses. It is extremely important to communicate clearly with employees how increase percentages were determined. Inflationary increases are typically communicated on a company-wide level, because it is the same for everyone, whereas other increases should ideally be communicated on an individual basis, and before salaries are paid. This manages expectations and prevents unhappiness and gossip amongst employees.

 

It is preferable that performance management cycles are synchronised with increase dates. Performance ratings are then used to determine individual increase percentages.

 

4. The Bell Curve and Calibration:

Forcing business units/divisions to have a fixed percentage of employees rated as underperforming or exceeding expectations is an antiquated approach that was appropriate 3 decades ago.

 

Rather allocate an increase budget to each division and allow the manager to allocate the increases themselves.

 



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