The merit matrix and salary administration
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The merit matrix and salary administration

Salary administration, budget allocation and performance increases

At the employee level of salary administration one of the key issues is, how are we going to allocate salary increases? We’re talking not about structure adjustments but actual employee pay.

We want to reward performance. We want to make sure in our salary administration scheme that our top performers are paid higher than our poor performers. And at the same time, we want to take employees who are paid close to that minimum and accelerate them through the range. Somebody who’s paid close to the minimum should get a higher increase than somebody who’s paid close to the maximum given a similar level of performance.

What does this look like for salary administration?
Picture this box as a sandbox. And let’s say we have a salary increase budget of 4%. So we know that we’re going to increase salaries on average by 4%. If sand is dollars, we have just added 4%.

We can give out and hit our budget and not exceed our 4% budget by spreading that sand perfectly equally. Every employee gets a 4% increase. We’ve hit our budget. That’s the good thing. On the downside, we aren’t rewarding performance. We aren’t accelerating people through the range.

So instead, let’s take the sandbox. On our left hand side, let’s put our employees in to categories. Are they high performers? Are they low performers or are they somewhere in the middle?
Going back to our sandbox, now that we’ve kind of labeled employees and put employees in the sandbox, what we’re talking about doing this merit matrix that’s filled with 4% more sand, we’re not talking about adding more sand, that’s just adding more dollars.

What we’re talking about is taking that same 4% and putting our hand in the sandbox in the bottom right hand corner where we have your highly paid employees who are performing at a low level.

We’re putting our hand on the sandbox down there. We’re taking some of the sand away from that corner and we’re moving it to the upper left hand corner. Here, we have our high performers that are paid low relative to the market value of their job. We want to retain them. And so we’re going to do that by giving them a larger salary increase.

So again, the salary administration concept here of a merit matrix is not to add sand to that sandbox but it’s really to shift that sand and move it up and to the left.

From the Rapid Learning Institute webinar: “How to Set Pay Ranges That Are Fair and Effective” by Ed Rataj

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