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

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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 ranges and 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.