When to increase employee pay

Knowing when to offer your people a raise can be a tricky question, especially in an environment of economic uncertainty and chaos. In addition to concerns about burnout and health benefits, inadequate compensation is one of the key reasons why people quit. 

But payroll budgets are limited and spreading them thin in a ‘peanut butter’ strategy does more harm than good. So how do you as an HR leader decide when pay increases and for whom?

Typically, CompTeam recommends three scenarios in which employee pay should increase:

1. Merit increases:

Through a performance management process, increase pay for people who have consistently displayed better performance (pay-for-performance) or gained more skills (pay-for-competence).

Pay is directly linked to the feeling of self-worth that people have. Hence, rewarding high performers is likely to make them feel more engaged, leading to longer tenures and higher productivity.

However, ensure that you align the criteria used for merit increases with your business objectives and communicate the same to your people as well. Irrespective of the philosophy you follow, what is imperative is the need to differentiate pay for people who create more value for your business. Awarding them higher pay increases is likely to motivate them as well as the rest of the workforce to contribute more.

2. Market pay adjustments:

The ‘cost of labor’ in a geographic location does not stay constant. Based on demand and supply changes, the ‘going rate’ for a job may fluctuate.

For example, if more and more software engineers flock to a particular city in search of opportunities, the market pay for them may decrease due to easier availability of talent. However, demand for niche skills like AI programmers may still remain high, leading to a pay differential between the two.

Similarly, mining engineers based in Mongolia may need to be compensated differently from the average for the same job in Salt Lake City, because of the scarcity of talent.

However, in such cases, the entire pay range for the specific job is revised and all individuals performing the job are repositioned as appropriate.

3. Promotions:

On being promoted, people should get significant increases in compensation to account for increased role complexity and responsibility. Otherwise, it is easy for them to feel demotivated and unfairly treated.

If the employee’s current salary is below the minimum of the new range applicable post-promotion, the increase must be large enough to move them into the new range. However, if you cannot immediately justify a large increase, create a plan to transition the employee into the new range over a specific time period. Also, make sure you communicate this clearly to them.

Conclusion

The overall pay increase philosophy needs to stay aligned with the contributions that people make at work and to reward those who create exceptional value. There can be other exceptional circumstances that necessitate increases for individuals or ‘off-cycle’ increases as well.

To discuss more about when and how to award pay increases to your people using an objective and clearly understood process, reach out to us at [email protected].

About the Author

Sumit Singla

Founder of eleventHR Consulting.

Sumit has been working in HR & HR consulting roles for 16+ years across sectors and verticals and specializes in organization design, wellbeing, storytelling & design thinking, and performance management. In his career with consulting firms such as Aon, Deloitte, and Accenture, he has successfully led programs aimed at total HR transformation for clients. Recently, as Associate Director for India Consulting at Deloitte, he worked with clients on cultural transformation and HR process and policy design. He also organized and spoke at conferences and events about a variety of topics relevant to HR today. Now self-employed, he works with clients across the globe on a variety of HR solution areas.

Howard Nizewitz 

Howard’s extensive expertise in compensation management comes with a 25-year track record of implementing strategic and successful compensation programs in the financial services and technology industries with a global and regional focus. His tenure includes positions at Barclays, Citigroup, and JPMorgan. Other areas of expertise include HR consulting, Deferred compensation, incentive plan design, and talent management. If you want to learn more, please contact Howard at [email protected] or schedule a free consultation on the compteam.net website.