The Right Way to Give Pay Raises

Stacey Carroll, PayScale.com

Last week, PayScale presented a well-attended webinar entitled, “The Right Way to Give Pay Raises.” This time of year, we hear from many of our customers that they have a raise budget for next year, but need help understanding how to best allocate the funds. The overall budget for pay increases seems to be between three and four percent for most companies this year. At the same time, research suggests that to truly drive behavioral change the reward has to be significant (upwards of seven percent). So, how do you motivate your talented employees to stay and perform at their best with only a four percent raise to give? The best solution is to use a Merit Matrix to differentiate raises based on three factors: market changes, proficiency, and performance.

Market Changes

The PayScale Index is your best resource for market changes in different cities and industries. Employees who are currently paid either below or at the market wage for their position should receive increases at least equal to the changes in the market.

Proficiency

Proficiency has a strong positive correlation with pay in the beginning of an employee's career lifecycle, but over time the positive correlation between pay and proficiency diminishes until that employee plateau's in their job and it becomes almost non-existent. The correlation between pay and proficiency is therefore dependent not only on the position but also the experience level of the individual. For example, a software engineer right out of school could expect a first year pay raise to be as high as 6%. However, an accountant with 10 years of experience could expect their pay raise to be less than 2%.

Performance

Almost every organization I've ever worked with wants to reward employees who perform better with more money. It's a smart factor to allocate into raises. Your company will have to decide exactly how much weight you’ll give the performance factor of the raise budget. There is no hard and fast rule on performance based rewards.

With an understanding of these three factors, you can use your pay rangesand a merit matrix to account for all of these factors in your decision making process regarding increases. PayScale Insight automates this process for you with its Raise Recommender feature and makes it a simple task to get through. 

Your merit matrix will likely have rewards ranging from 1-15%. If you focus on holding merit increases down for employee who are paid high in their range (i.e. they are already compensated above market and are not performing any new skills), you will be left with more dollars to reward employees who are becoming more proficient or performing well at their jobs. I've seen organizations take a 4% budget and provide rewards in excess of 10% for SOME of their employees as it's warranted.

I hope this can help you to talk with Senior Leaders about how to budget for and allocate raises that will improve retention and performance where it’s needed most. Share your success story if you’ve been able to do this at your organization.

In case you missed the webinar, here’s the video recording of PayScale’s recent webinar, The Right Way to Give Pay Raises.

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