Salary increase or not? | Gallagher HRCC (2023)

Most employers today continue to struggle with decisions about salary adjustments. Who should get it? How can the costs be justified? What if the employees are already overpaid? And if they're overpaid but excelling, what should you do? Can you deny raises to some while giving them to others without seeming unfair? What if there is a pay freeze for a year or more? These questions can all be answered by considering the organization's intentions, resources, and past practices.

What we observed and why it matters

We know from the experience of more than 1,000 clients that employers that do not have a defined structure and systematic approach to managing base pay tend to overpay about 25% of their employees and underpay another 25%, leaving only about half is left the employees actually paid between plus/minus 10% of the place value or average.

Of course, this data can only be compiled after the organization has developed a job classification system and job values ​​have been established and compared to actual employee salaries.

Meanwhile, overpaid employees are costing the company more than it needs to in payroll and wage-related benefits. Giving overpaid employees raises not only makes them overpaid than they were before, but such raises become pensions—ongoing costs that continue year after year. Not exactly an inexpensive situation.

Reasons for improper payment

How do these situations arise? Even if jobs are correctly valued in the market place, the use of broadband broadband offers, 'earnings' matrices and other common administrative practices that result in yearly increases in entitlements simply perpetuate any pre-existing wage inequalities. In addition, when new hires are hired, salary determination, which mostly results from negotiations, often leads to starting salaries that are too high or too low, which are “chiseled in stone” for the duration of the employee's employment with the company. In these cases, annual increases do nothing but perpetuate the injustices from year to year.

How can employers fix this problem?

Correcting these situations is often a two-step process: (1) making specific "equity" adjustments as needed and affordable to result in competitive, reasonable salaries for underpaid employees, and (2) improving ongoing payroll management practices to focus more on focus on actual pay rather than just incremental percentages for subsequent years.

Step One: First Action

Once the problem is defined, the first step is to create a scenario, usually through trial and error, that will determine under what specific circumstances salary adjustments will be made based on percentages that represent an “ideal” pay for individual employees who based entirely on two factors: (1) how much their work is worth and (2) their level of achievement.

For example, an initial scenario could be defined as follows:

In this scenario, all employees with fully satisfactory performance ratings whose comparison ratios are not ideal receive an adjustment of an amount that will result in a new salary equal to the specified ideal weighting percentage. (Comparative ratios are actual salaries as a percentage of job values ​​or median values ​​for the job.) The scenario can be more or less clear-cut as desired. If the employer knows the cost of bringing all employees up to their ideal wage, the scenario can be modified to suit their budget by changing the ideal wage percentages.
An assumption typically made as part of the calculation process is that individuals who are currently being paid more than their ideal salary will not receive any salary adjustments. If necessary, employers may consider paying one-time lump sums in lieu of increases to make it easier for fully-performing employees not receiving increases to adopt the new policies.
On rare occasions, some employers consider taking pay cuts, particularly for underperforming individuals. Many factors go into this decision and it is not usually made.

Step Two: Ongoing Administration

This step involves the development of the organization's ongoing salary philosophy statement and policies. If adjustments to these defined ideal salary levels as mentioned above cannot be made due to cost considerations in the first step as described above, they should be paid as planned in the next and/or subsequent years.

The difficult problem of overpaid workers

There will certainly be employees who do not receive any salary increases in stage one or even in stage two because they are already being paid above the ideal. Obviously, the funds saved by withholding such increases will help to adjust the salaries of the underpaid.
In our experience, about 5-10% of total payroll costs can be saved if wages are managed in a disciplined manner. One of our clients recently calculated that he could save almost a million dollars over the next two years simply by freezing the salaries of overpaid employees.
During the economic downturn, some of our clients have even cut the salaries of people who were significantly overpaid. If you decide to cut and/or freeze salaries, make sure it's done consistently and within the guidelines and scenarios you've set.
It's especially important to be careful with pay freezes or pay cuts, especially when it comes to employees who are valued high performers and those you need to keep. In addition to the lump sum payment option, you can consider the following options if they apply:

• Offer cash incentive bonus opportunities based on measurable performance results
• Carefully analyze the person's job functions/roles to determine if it makes sense to 'enrich' the job in a way that warrants a higher job value (only do this if genuinely legitimate).
• Use this opportunity to work with the employee to improve their performance to a level that would justify a higher "ideal" salary
• Promote the employee to a more senior position elsewhere in the organization provided he/she is qualified and interested

If all else fails and you feel you must continue the employee at a salary higher than your policies warrant, be sure to document the reasons for doing so.

This will help the organization in the event of pay discrimination or a wrongful termination lawsuit and also provides a history and rationale of the situation for managers who come after you.

communication of the approach

It is very important that there is clear, unambiguous communication in both steps of this process. Terminology is crucial. Refer to any salary increases as "adjustments" so as not to associate them with what were likely referred to as "earnings increases" in the past. In the minds of most people, performance increases are nothing more than claims.
If lump sum payments are made in place of increases, you should not call them "bonuses" as a bonus payment is performance-based compensation.
It's also important to communicate the rationale for new payroll management practices, especially in cultures that have been claims-based for many years.

Plan maintenance over time

Once all employees are indeed earning their ideal amount, ongoing pay management consists of making salary adjustments each year (we recommend focus adjustments) that reflect each employee's standing and performance.

The salary structure should be adjusted to reflect labor market inflation and any employees whose job and performance have remained the same will most likely receive an adjustment equal to the structure increase.

Be careful not to present this as an overall increase or as an increase in the cost of living, as neither is the case. If the status or individual performance changes, this is taken into account in the salary adjustment.

• Also remember that unscheduled salary adjustments can and should be made to reflect events such as:
• Newly hired employees are fully competent in the performance of their duties
• Significant performance improvements that appear to be long lasting
• Jobs reclassified due to changes in level of responsibility, reporting relationships and/or dramatic market changes.

success factors

The success of this recommended approach depends on ongoing maintenance and management of the following:

• Accuracy and completeness of the job description
• Ongoing job evaluation and labor market research to reflect both internal and market changes as they occur
• Hiring practices in line with the salary plan to avoid over- or under-paying new hires
• Processes for measuring success that are taken seriously and used as a management tool
• Effective, repetitive communication of payroll policy and plan

In summary, employers who are serious about providing competitive, fair, legal, and cost-effective pay will find that following these compensation strategies and policies will not only lead to the achievement of these goals, but also increase employee engagement and the increases the overall success of the organization. While this is definitely not an easy process at first, your courage and determination will eventually pay off!