Give Salary Compensation Increases That Reward Your Best Employees First

by on June 29, 2009 · 0 Comment POSTED IN: HR Info Center

Build A Salary Compensation System That Works

The focus here is on actual salary compensation increases not structures. In other words, we’re not looking at what are an appropriate minimum, midpoint and maximum for the job.

We’re talking about actual employees and how much of a salary increase should they receive. The focus of a merit matrix is to balance rewarding performance but also to accelerate employees through the range, to accelerate people from the minimum to the midpoint. Once they get above the midpoint, we are going to start decelerate them somewhat. Once they become above market competitive pay, we’re going to slow down those increases slightly.

Imagine a sandbox. We have our top performers in our organization at the top, our poorest performers at the bottom and our middle performers somewhere in the middle of that box. We overlay across the top salary compensation and that’s relative compensation or compensation relative to their job, it’s not absolute salary compensation. It is how somebody paid within his or her range. The low end would be the minimum of the salary range. High would be the maximum and somewhere between would be the midpoint of the range. If we fill the sandbox with sand or dollars and you have a 3.5% salary increase budget, we can smooth that sand out in the sandbox so everybody gets 3.5%.

The good news is that we haven’t exceeded budget, we spent 3.5% because we just gave everybody 3.5%. The bad news is that we are treating our poor performers the same way that we’re treating our higher performers. We’re also treating the people that we’re at risk for losing due to pay, we’re treating them the same as the people who are close to the maximum, where they probably can’t leave and find another job for the same amount of money.

The idea behind the merit matrix is to put your hand in that sandbox and move sand or move dollars from the bottom right where we have our high-paid, low-performing individuals and move it into the hands of our low-paid, high-performing individuals. We’re going to put our hand to the sandbox in the bottom right and move sand up into the left.

The way this looks in real life, is if we divide performers, in this case we have four levels of performance. So, four may be Outstanding, a three, maybe Above Average, a two, Below Average and a one, Poor, for example. We’ve taken our salary compensation range and we’ve divided that into quartiles. From the minimum to the midpoint, we have quartiles one and two. We just divide the minimum and midpoint in half and that separates quartiles one and two. Our maximum would be above quartile four, and simply splitting the midpoint and maximum in half because of the divider for quartiles three and four.

We’re going to put our hand to the sandbox and we’re going to take dollars away from the bottom right, we’re going to make that a zero. We’re going to put dollars in the upper left and make that our 3.5% budget, we may make that a 7% salary compensation increase. Again the idea is to accelerate people through the range. As you move to the right, people are going to get larger increases as well as going to reward performance. As you move up, people are going to get larger salary compensation increases.

Edited Remarks from “How to Set Pay Ranges That are Fair and Effective” by Edward Rataj

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