Annual Salary Increases Are Not Necessarily Guaranteed

Friday, February 1, 2013

It may come as a rude awakening in this post-recession world to many employees, but some organizations are rethinking annual salary increases which were quasi-automatic in the pre-recession days. Employers have begun to question why an employee who has completed another year of service should be rewarded with an increase in pay. Traditional thinking said that an employee with another year of service is worth more due to their increased level of job experience, i.e., productivity. Additionally, since the worker’s earnings now purchases fewer goods and services than it did a year ago due to inflation, it was only good employee relations to keep the employee at least whole. Lastly, if employees are not given increases they pose a potential turnover risk and might leave to go to a competitor. Historically, at least on the surface, these arguments appear to make perfect business sense.

First, does an additional year of service garner an employee more experience and is that gain in experience worth more compensation? It depends on the job’s learning curve. Mastering a job is a function of how often a task is performed and the time between performing each task. Some jobs can be mastered in 30-90-180 days, others may require years. Whether an organization rewards additional experience will depend on how valuable the organization perceives more experience to be and whether it adds value to the goods and services the organization produces.

Second, should an employer maintain the living standard of its employees? The initial employer reaction is No! However, employees would argue that they are part of the means by which an organization generates goods and services, and oh yes, revenue. Of course that revenue must be shared with a number of stakeholders including owners, investors, and employees. Once again, how and when an organization approaches inflation, even in times of relatively low inflation, is part of its total rewards philosophy and will have a direct impact on productivity and turnover.

Lastly, if employees are not rewarded, will they leave and go to a competitor, possibly taking valuable business knowledge with them? Marcus Buckingham, Curt Coffman in their book, “First, Break All The Rules: What The Worlds Greatest Managers Do Differently”, they reached the conclusion that employees stay or leave companies based on what their managers do or don’t do. While that may make little or no sense, if given some thought most of us would recognize that we spend a third or more of how daily lives interacting with this one person. Being rewarded can mean more than a big increase in pay. A new assignment with more visibility, a chance to show off hidden skills, solving a problem others failed at, learning a new system, the accolades of our peers, and the recognition and visible appreciation of managers.

In the end, any increase in cash compensation or other rewards must be based on the value created by the employee and added to the goods and services an organization produces. This is true for governmental, for-profit, and not-for-profit organizations. The perception that any increase in rewards is guaranteed and simply a matter of completing another year of service, is in and of itself demotivational.