“Why doesn’t my company
consider inflation when determining my pay increase?”
What this employee is
asking is, shouldn’t my annual increase percentage at least match the
cost of living? And as management is forever touting the company’s
”pay-for-performance” philosophy, shouldn’t my increase be higher than that,
given that I’m a good performer?
Have you ever been in
a situation where an employee complains to you that their pay increase is no
better than the inflation rate? Or worse, that it’s lower? As a further
aggravation they might ask you how the company can say there’s a
pay-for-performance policy when all they do is grant increases that no more
than match the inflation rate? It’s like treading water or running in place. It
doesn’t seem fair or like a reward for good performance. Shouldn’t everybody
receive at least an increase equal to the inflation rate?
Shouldn’t increases reflect more than just a cost of living increase for the
higher performers?
The truth of the
matter is that it’s common practice for companies to only give a side look at
inflation (cost of living) when determining their annual increase budget. They
do make note of it as a reference point and to compare against a final
decision, but what they’re actually focused on are two prime considerations: 1)
competitive market survey data that tells them what everyone else is paying for
like jobs in their area; and 2) the expense (annual grant and fixed costs) to
maintain the desired competitiveness.
Companies routinely
promise to pay competitive rates and, as such, will analyze what they consider
the marketplace to learn what other companies are paying for jobs (base salaries)
and what they are granting for increases. Their so-called “promise” does not
include the granting of inflation-proof increases, or even an implied
obligation to reflect the cost of living in their analysis. Their intent is to
pay employees a competitive wage – including increases – and by “competitive”
they mean what others are doing, not necessarily what is
happening out there in the world of inflation.
If affordability is an
issue for any given year, it’s likely that maintaining competitiveness will
have to suffer. A quick review of salary actions over the past three years will
confirm that.
Fairness is in the Eye
of the Beholder
Is that a fair way to
manage compensation? Well, let’s imagine your name is on the company door. How
would you spend your money? It’s likely you would seek to pay the lowest amount
possible while still attracting, motivating and retaining qualified talent for
your business. That strategy doesn’t imply decreasing pay levels but, as the
owner, you would want to allocate your substantial payroll expense as
effectively and efficiently as possible to staff your business with qualified
and engaged employees. It wouldn’t make good business sense to spend more than
you need to, be it for bricks and mortar real estate, raw materials or employee
compensation.
Consider the market
for talent similar to a purchase at a retail store. How frequently would you
pay more than the commonly accepted price if your extra money gained you no
added value? Chances are you would not often take that approach.
Other Perspectives
Now let’s consider
this issue from the employee’s point of view. What factors weigh heavily on
their minds when considering the potential for pay increases?
Most employees expect
management decisions on compensation to reflect either the inflation rate (cost
of living), the average increase for their industry/geography (typically as
pointed out by newspaper “factoids”), or – if the company had a good year – a
share of the financial success. You can be sure, though, that the figure employees
have in mind is the highest of these three possibilities. And lest you forget,
that figure is only for the average performer; better employees should receive
more.
Now this view is not
necessarily wrong, from their perspective, and one can certainly not blame
employees for a viewpoint that puts their interests first. However, companies
typically maintain a “this is a business first” strategy, one that seeks to
minimize controllable expenses without losing sight of their competitive pay
target. The goal of paying competitive wages is not likely to be overturned by
changes to the cost of living, newspaper snippets or a “feel good” moment
following company success.
Another factor to
consider is that employees are comfortable with changing their reasoning from
year to year, while companies are stuck on the same track. So when inflation
goes up or down, the company has a good or not so good year, or the media is
touting industry averages, employee expectations may likely swing from one
argument to another, rationalizing a consistently more aggressive pay increase
strategy.
Now for a little
tongue-in-cheek: turnabout is not considered fair play. Employees would not be
pleased if the size of their increase were to fall with their chosen economic
indicator. It should only rise. They would similarly object to smaller
increases if the company hit a rough patch or if inflation nosed downward. It
should be no surprise that employees would want their cake and to eat it too!
However, management
strategies tend to be consistent over time, continually focusing on the
marketplace and its affordability to maintain a posture of providing
competitive pay and pay increase opportunities.
So how do you avoid a
clash of employee expectations vs. management strategy? If companies would do a
better job of communicating their pay philosophy they would be able to allay
the employee guesses and assumptions that always accompany the grapevine rumor
mill. Employees would know in advance what to expect. They might not like what
they hear, but the employer/employee relationship would be improved by some
straight talk about how pay increases are determined.
