Promotional Increases, an Alternative to Merit Increases

Saturday, September 25, 2010

While very modest increases in the range of 2% to 3% in salary and merit budgets have surfaced in the last 12 months as the economy slowly recovers, one bright spot is promotional adjustments. It appears that organizations are willing to grant larger increases to those employees who are willing to take on higher-levels of responsibilities. As organizations reduced their staff, many surviving employees were expected to accept additional duties. In some cases, those additional duties were simply more of the same. However, in other situations, those extra duties included higher levels of responsibilities, and even supervisory assignments. Thus, it is only reasonable that many organizations are willing to pay more for employees who have the ability and willness to accept new roles.

The WorldatWork 2010-2011 Salary Budget Survey, published by WorldatWork on July 06, 2010, analyzed 2,724 submissions from the United States and Canada. Alison Avalos, research manager for WorldatWork commented that, “… promotion could mean an additional 7% to 8% increase …”. In additional, the survey also revealed that organizations where to pay out some 5% to 15% in variable pay, depending on the employee’s job classification. While survey respondents are willing to set aside only 2.5% on average for merit pay, those same organizations are willing to 7% to 8% for a promotion and 5% to 15% for variable pay. So why are organizations willing to recognize employee attainment of higher levels of responsiblity and reach higher levels of production and/or productivity with pay two to three times that for merit performance?

In the case of promotional increases, organizations are willing to reward attainment or acceptance of higher levels of responsiblity since it often brings with such achievement a significant gain in productivity. It is often a real possibility that a promoted employee will retain some portion of their old duties while taking on new ones. Even if a new employee is hired to replace the promoted employee, the promoted employee is often on hand to help “bridge the gap”. Furthermore, the promoted employee is also able to provide continuity so no customer service, product or client knowledge is lost.

At the same time, a promoted employee may be less likely to leave the company and even in these times, it is still difficult to retain top performers. Handled correctly, a promotion of a well-qualified performer sends a strong message that “I too” may have such as opportunity in the future. I once worked for a large ($1 billion +) southern bank, we knew that as our customers opened new accounts and purchased new products from us, the likelihood of that customer leavening was lessened. The same can be said for an employee, if the organization can retain the an employee long enough (3-5 years) to vest in the 401(k) plan, receive an increase or two, earn a promotion, and build a social network within the organization, like my bank’s customers, the likelihood of that employee leavening is lessened.

A 2006 research paper by Kiyoshi Takahashi an associate professor at the Kobe School and Business Administration found that “promotion fairness” and “development opportunity” carried the greatest value in effecting the levels of motivation associated with a promotion. This effect was true for both “white” and “blue” collar jobs.  An earlier study by Charlie O. Trevor, Barry Gerhart, and John W. Boudreau of Cornell University reported that promotions had a significant role in employee retention and that the lack of promotional opportunities could lead to increased turnover.