Answered by Debra Thompson, President, TG & Associates

Question:
It seems that my employees are always coming to me and asking about pay raises. Do you have any suggestions on how I can handle these requests and get my situation under control?

Answer:
What you describe is a common problem for many businesses. When setting up the business and bringing on the first employees, there are rarely processes in place that spell out the way compensation is handled. In the absence of procedures, employees can invent their own timetables for getting pay increases, as well as their own rationale for a particular increase. The solution for the business is to define a policy that is clear and then stick to it.

Before I get too far in setting a policy, I would like to suggest some forms of compensation and ground rules to consider when creating the policy. Clearly, the area of compensation can go to great depths as it comprises benefits, personal/vacation pay, 401(K), travel reimbursement and so on. In this response, I want to focus on just three areas of compensation where issues seem to occur most frequently in businesses:

• Bonuses. Many companies provide bonus structures that are used to motivate individuals to achieve more in their positions. This is where some type of monetary reward is tied to the accomplishment of a specific task or goal in an exemplary manner. These bonuses can be commissions on sales or rewards for rates of production in specific areas. This money does not change the base compensation level for the employee; it just gives him or her a spot award. And of course, it is individually structured and may be documented in a written agreement.

• Results Sharing. In order to tie rewards to overall company performance, results sharing may be given at the end of specific time periods to reflect the entire company’s achieving agreed-upon goals. So if sales and profit goals are met for the year, then each employee receives a reward that can be a percentage or a flat amount. In any event, the criteria for this award are set at the beginning of the designated time period and the amount may also be defined. This plan, like the bonus, does not affect base pay and is distributed evenly to all employees in the group.

• Merit Pay. This is what everyone looks for because it results in an increase in the base pay. To be effective, this must connect to relative performance. To avoid employee badgering, it should be scheduled for a set time of the year. The top performers in the company should receive the highest increases to reward their greater contribution to the company. Too often, the increases are “peanut buttered” across the staff, instead of recognizing the high performers with a greater increase. Given that a company only has a limited budget to spend on merit increases, the logical consequence of giving some employees a significant increase is that lesser-performing employees get a smaller increase or even no increase.

So how do you make it all come together? First, your policy must address clearly whatever compensation methods you intend to use. Specifically define bonuses and results sharing in terms of the performance period and the results required to trigger those rewards. They must be spelled out in advance and should reflect a challenge clearly so that employees understand that effort is involved in receiving them. Be careful that you do not set the goals so low that bonuses and results sharing are rewarded habitually and therefore become an expectation. Once workers anticipate regular rewards, any period that results in a no-bonus situation will create some hard feelings.

I would encourage setting a specific time frame for merit increase awards. By scheduling them to follow shortly after the annual performance reviews, each and every employee will know how they did against their job description and their individual performance goals. After all reviews are completed, meet with key managers to rank the order of employees in an objective manner that truly reflects their relative performance. Then allocate your merit budget with the highest performers getting more. For example, if you budgeted a 4% increase in your total salary base for merit, then high performers should receive 6% or 7% and lower performers get 2% or even 0%. This is a tough process that requires you to stick to your guns.

The bottom line is that compensation is a performance-based reward. No matter how tough life is for the employee, do not base bonuses and merit on a hard-luck story. If an individual’s performance does not warrant an increase or reward, then don't give it. As I stated at the beginning, the key to compensation is defining a policy that is clear, then sticking to it.

Good luck,
Debra

Debra Thompson is President of TG & Associates, specializing in Human Resources for the graphics industries. Debra is the winner of the 2003 PrintImage Industry Award of Distinction. She can be reached at 877-842-7762 (toll free) or debra@tgassociates.com. Visit www.tgassociates.com for more information on hiring and developing top performers.
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