How to Allocate Raises

Fair pay increases will boost employee morale.

Determining which employees most deserve raises, and how much to give them, can prove challenging. Avoiding pay compression -- similar pay for employees with different skill and responsibility levels -- is one important consideration when giving raises. If subordinates have nearly the same salary as their supervisors, for instance, the supervisors will feel resentful for doing more difficult work for similar pay. Careful planning will help to avoid such difficult scenarios.

Instructions

1. Determine what competitors are offering in your region.

2. Consider your organization's ambitions. If you aim to make your firm the most skilled technological team in your area, you'll need to reward your high performers generously.

3. Create an organizational structure diagram reflecting your company's hierarchy. Write each position in a box, placing the most prestigious positions on top and the entry-level positions on the bottom. Write your company's acceptable salary range for each position under the title in the appropriate box. This diagram will serve as your guideline for awarding salary increases, ensuring that employees at different levels on the hierarchy don't have the same salaries.

4. Consider how much your business has grown (or shrunk) over the past year to determine how much you can afford to pay in raises. However, remember the hidden costs of low salaries -- namely, declining morale and focus. Think of raises as an investment, not a luxury. Satisfied, motivated employees can help your business to boost its performance if economic times have made business slow.

5. Decide on your payment philosophy. To keep employees motivated to work their best, opt for a performance-based payment system that gives the highest increases to the highest-performing employees. Consider employees' seniority to reward their loyalty for staying with the company as well. To combine philosophies, design your own point-based system with points for merit, seniority, increased training and any other factors you find important.

6. Ask employees to write self-assessments for the past year. They'll point out their own greatest accomplishments, so you'll be sure not to overlook anything important. Verify their statements, of course. Consult with employees to clarify any points of confusion.

7. Review your own records of employees' accomplishments. Reflect on their daily performances and how much they have progressed. Consider their ability to work with others as well. If you don't observe them on a daily basis, consult with a supervisor who does.

8. Evaluate how much you need each employee's skills. Employees with rare skills may not be more competent than others, but they may be highly in demand. Without a pay raise, they may leave for a better offer. If you must choose between two competent employees, giving the raise to the employee with rare skills will probably serve your company better. Remember, equally competent employees in different fields often earn vastly different salaries because of market demand.

9. Give smaller increases to employees who perform consistently but not at the same level as your highest performers. When they know they can achieve raises and are appreciated, their morale may be boosted. Compensating them for their loyalty makes financial sense for your organization as well.

References

• "Human Resource Management"; Robert L. Mathis et al.; 2010
• "Leadership Handbook of Management and Administration"; James D. Berkley; 2008