by Dave Mount
Salary Increase Primer for 2010
One of the biggest challenges to managers today is determining the salary increases we should give to our employees. Big companies and government agencies have “compensation analysts” who spend their time comparing employee duties and assessing the correct amount of compensation for each position. They also participate with management each year in determining the amount of annual increases. But most Vermont companies are not big enough to have compensation analysts, so we need a primer for the rest of us.
I think we need a few parameters to start a discussion.
• We are not, generally, an inflationary society. The last serious inflation we had in the United States was in 1980.
• Companies can get into a lot of trouble when people doing the same things are paid in different ways.
• Employees expect — and some would say, deserve — an annual salary adjustment.
• Company sales do not always keep up with salary demands, thus squeezing profitability.
• The Vermont minimum wage, one of the highest in the country, impacts pay at all levels.
If we are fair and intellectually honest about it, a good salary increase for someone who is not changing duties is a bit above inflation. Through December 2009, the 12-month inflation rate was 1.8 percent. That means that anything over 2 percent is actually generous.
When we give raises in an irrational way, we wind up with a problem of disparity, which can be very costly either in employee turnover or in make-up pay. These disparities seem to make the news in Washington and similar places when one secretary is “favored” over the others, but they have no place in business. We need to create a system that is fair and equitable.
One method I have used in the past that seems to work well is to set the average increase at a bit more than inflation. For 2010, let’s assume that is 2 percent. I then look at the performance of all the employees and have above-average, average, and below-average categories (following my November advice, the averages would apply to expectations, i.e., “meets expectations” is average).
Following the 2 percent average, we can say that above average is 3 percent, average is 2 percent, and below average is 1 percent or zero. The math will work if you are being truly honest in setting the average. If more people are above average, then the increases will move above the 2 percent.
Sometimes, the so-called “soft benefits” can be just as or more effective than raises. Suppose you decide that, after the disastrous economy of the last 12 months, you cannot afford across-the-board increases to your employees. You are not alone in this. Soft benefits are those that do not involve an additional cash outlay — holidays, for example. Adding a couple of personal days may go a long way if there are no increases in sight this year; or consider giving a one-time additional week’s vacation or some variation of that. The recession has hit everyone — except, perhaps, bankruptcy lawyers — and our employees understand if you cannot give an increase, but the recognition coming from a soft benefit will go a long way toward ensuring employee loyalty.
Finally, if you are able to give a raise but are worried about the impact on your bottom line of compounding raises from year-to-year, consider a one-time bonus that does not affect the base pay. From a cash-flow standpoint, this is not absolutely ideal, but by not giving an increase that will become part of the base, you have more options in the following year.
Dave Mount owns Westaff in Burlington. •