Across-The-Board Raises – Increase Cost and Reduce Performance
October 10th, 2011Employee pay is a key tool in fulfilling many corporate objectives. Among these are: attracting top performers; maintaining employee satisfaction; ensuring strategic alignment; increasing performance; and encouraging innovation. However, Robert Heneman, a noted compensation consultant says, “The ultimate goal of a pay system is to align the goals and interest of employees with the goals and interest of the organization.” How do across-the-board raises help achieve this?
First, it’s important to recognize that most top performers are driven by achievement. Since achievement is an internal motivator, organizations can harness its power- as well as the power of other internal motivators- by setting clear goals for individual and team performance.
Management by Objective (MBO) is one way organizations have found to tap into the power of motivating employees to achieve. Across-the-board raises are not based on achievement, and so they miss out on harnessing the influence of a powerful internal motivator. Top performers would rather work in an organization that recognizes and rewards both their achievements and the effort that goes into them.
Over the last few years, several federal organizations have raised the salary range for many of their employees. This was done primarily as an effort to both attract and keep high achieving employees. Is this a workable strategy producing positive results? We think not. As stated previously, most high performers are motivated to achieve. Without a system that rewards their efforts, one of two things almost always happens: Either the high achiever leaves; or there is a noticeable drop-off in achievement. Instead of a race to the top with appropriate rewards for those who make it, across-the-board raises turn beneficial competition into a race for mediocrity.
Are across-the-board raises effective in helping maintain employee satisfaction? Good question; There are two ways to allocate across-the-board raises, either through using a set amount or through using a percentage of salary. Some employees respond positively to the first method, others to the second. A flat cash payment typically produces a more favorable impact on low paid employees than it does on higher paid employees. Here is one example that was reported this month in The Tribune-Review. An article by reporter Liz Zemba features this quote: “County Manager Warren Hughes said the total approximate cost of the $1,000 raises is $84,000, compared to $90,000 for the 3 percent raises. At the same time, the $1,000 raises help lower-paid employees who otherwise would have had smaller increases under the 3 percent scenario.”
Then there are organizations that believe across-the-board raises help control costs. Sadly, they are mistaken. Consider this example: We took a sample group of 500 nurses in the same position and applied across-the-board raises to some, and performance-based pay increases to others. Each nurse in the across-the-board group received a 3% raise.
We divided the performance pay group into these segments: Top performers received a 3% raise; Meets performers, the middle 80%, received a 1.5% raise; and the bottom 10% did not receive a raise, so their salaries remained the same. Review the spreadsheet below for our results:
Notice pay increases over the first year are 1.46% ($262,500.00) more in the across-the-board group more than the performance-based pay group. In four years, the pay difference is 4.29% ($1,092,997.00) more. When you differentiate your work force you save money and reward achievement. Did the County quoted above save money? Yes, about $6,000.00. Could he have saved significant more by rewarding individual performance with a pay increase, most certainly?
A study by Watson Wyatt Worldwide found doing a better job of rewarding employees for good work—and refusing to accept subpar performance—can earn a company a 16.5 percent higher market value.
Firms that improve their selection and use of health and retirement benefits can increase shareholder value by 7.3 percent. Linking pay to performance is associated with a 6.3 percent increase.. A company that recognizes variations in performance by promoting the most competent employees, helping poor performers improve and terminating chronic nonperformers can boost its market value by 2.2 percent.
A second study by Michael C. Sturman, Ph.D., entitled, Using Your Pay System To Improve Employees’ Performance, was designed to show how pay policy directly affects employee performance. The study shows that employee performance is significantly influenced by two factors: how much money is involved, and how that money is paid out. While merit pay and bonuses yield minimum performance increases, the study points to the relationship between pay and performance as producing the greatest benefit. Having a strong pay-for-performance link with bonuses- not raises- projected a performance increase as high as 20%. Increasing the merit pool by 1% without changing allocation procedures was projected to increase future performance by roughly 2%.
Study after study proves that providing a clear link between pay and performance not only raises future employee performance; It is also an effective means of containing relative costs. Across-the-board raises are easy to implement. However, the question you must ask is this: “Will the reduction in employee motivation and morale be worth implementing across-the-board raises?” The answer is a resounding “No!”
