Salary Compensation Isn't Based Solely On Performance

by on June 11, 2009 · 0 Comment POSTED IN: HR Info Center

Three factors go into determining increases in salary compensation

Pay for performance with regard to base salary compensation is the big lie and here’s why. Here’s the big lie in action, “If you work hard and you do well, I’ll give you a good rating and you’ll get a big increase.” In reality, you don’t pay for performance with base salaries, you can’t pay for performance with base salaries and most importantly, you don’t want to.

In reality, there are three key drivers of somebody getting an increase in salary compensation.

The first one is a budget. A budget is how much money you have to spend on salary compensation. Do you have any money? Right now, if you happen to be in the construction industry, if you happen to be in banking, if you happen to be in an organization tied to the economy it’s kind of an iffy time in history; we’re a little nervous about how much money to put forward. The harsh reality is we’ve got to have money before we talk about increases. This is the adult-to-adult conversation at its root.

Assuming you have money, let’s be realistic and talk about what is the second best predictor of an individual’s increase in salary compensation in the world of reality. There’s a long term compensation ratio. Compensation ratio means replacement cost. If this person were to leave, what do we have to pay him? Normally, larger salary compensation increases are given out in the early years because the employee has got a lot of room. It doesn’t mean we love you because we’re giving you a big percentage increase and it doesn’t mean we don’t love you when the increase gets smaller. It’s a function in large part of where you started. First we got to have money then you have to have room to give the employee an increase.

The third best predictor of anybody’s personal salary compensation increase is their performance. It finally factors in, if we have money and you have room, now, we actually care how you perform. But only if we have money and you have room, do we factor that in there. Now, we’re also interested in potential. Potential is whether or not you are silly enough to want more responsibility and good enough to earn it.

Edited Remarks from “How to Drain the Drama from Salary Reviews: A Conversation Roadmap” by Gary Markle

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