Question. My business evaluates the performance of our employees for raises during this quarter of the year. Do you have any advice for how to determine what’s most important in evaluating opportunities for raises?
A. Compensation is important to employees; most of us need to feel valued for the hard work we’re doing. While in our experience it isn’t the only reason why people leave their jobs, some employees share they would consider leaving a position to get a raise. Typically, business owners offer raises that recognize employee expertise, accomplishments and loyalty while keeping their pay scales roughly in line with those offered by other firms in their industries and geographic locations.
However, a business might want to reward specific employees who’ve made outstanding contributions to the company. How can you do that while maintaining company equity of pay and payroll costs in line? How do you balance what can feel like competing goals?
Balancing act. Money can be a sensitive subject for many people. Employees often view their salaries and raises not just as a means of providing for themselves and their families, but as an indication of how the company values their contributions. The ways in which managers decide on, and communicate, raises and other salary adjustments can have a big impact on employee morale and performance.
Consider developing a standard set of criteria to determine pay raises and apply it to employees within a particular function or group. Among the benefits of set criteria is that it reduces the perception of, and opportunity for, bias. Even a perception of partiality can dampen employee morale. Over time, it may harm retention and performance.
By standardizing the criteria you use to determine raises, you’re less likely to wind up with significant variations in compensation between different groups of employees. Standardized criteria can help ensure that, as much as possible, compensation fairly reflects performance.
Using raises to achieve goals. This doesn’t mean a business shouldn’t use raises to recognize and retain individual employees who’ve met or exceeded the goals set before them. When raises are tied to employees’ goals, those goals should be clearly communicated, measurable and challenging, but within reach. Goals should be both specific to a particular employee’s actions or role and tied to broader corporate goals or a strategic plan. For instance, a goal set for a warehouse manager could be to increase the percentage of on-time deliveries.
If a business is considering using raises to recognize seniority, it is important to note that longevity doesn’t automatically correlate with the value an individual brings to the company. In addition, regularly rewarding employees’ tenure with a company can lead to inflated salaries. For these reasons, performance-based increases will likely become more common than tenure-based increases. All policies around raises and compensation should comply with applicable laws and regulations.
Determining the raise schedule. Although many companies issue raises during employees’ annual reviews, other schedules can make sense. If a position typically experiences high turnover, your business might boost retention by offering new employees a modest increase after several months. No matter the schedule, let new employees know when they can expect their first review and opportunity for a raise. Communication is always key.
You’ll also need to decide how to handle employees who ask for raises outside the normal review time frame. Some companies assess these on a case-by-case basis, while others flatly prohibit them. If a raise isn’t feasible and you want to retain the worker, you can identify nonfinancial incentives that might appeal, such as a change in title or more flexible working hours.
Keeping employees in the loop. Communication around raises can be tricky. When talking with employees about their raises, take enough time to be sure they understand the rationale behind them. Ideally, you’ll be able to identify and thank them for specific contributions that factored into the raise. Especially in times like these, when our economy is impacted and many businesses aren’t able to meet revenue expectations, communicating realistic expectations for raises is important. Consider consulting with an HR advisor for additional guidance on developing policies around raises.
Crystal Faulkner is Cincinnati market leader with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. Tom Cooney is with Wealth Dimensions, an investment advisory firm. For additional information, call 513-768-6796 or visit online at mcmcpa.com. You can listen to Tom and Crystal daily on WMKV and WLHS on “BusinessWise,” a morning and afternoon radio show that profiles highly successful people, companies, organizations and issues throughout our region
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BusinessWise: Best practices for pay raise structures - The Cincinnati Enquirer
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