Merit Increases – 4 Things to Consider
Estimated reading time: 4 minutes
We are now into the 4th quarter of 2020, and hopefully, you’ve spent some time planning and developing your 2021 business goals!
Planning is one of the most important things a small business owner can do to ensure they achieve their mission and desired business results.
An important part of the planning process is creating an annual operating budget.
This important document projects revenues and determines how dollars will be spent. This includes determining merit increase percentages for the coming year.
Raise Allocation
Every organization is different in the way it determines and allocates raises. There are many different models and approaches to employee compensation.
A common model is a structured performance management process designed to develop employees, hold them accountable for desired results, and reward them for meeting objectives.
Merit increases are an integral part of rewarding a job well done.
Organizations that manage employee performance often achieve better results because high-performing employees get the job done and support strategy.
Merit Increases – 4 Things to Consider
1. Create A Structure
It is important to create a structure to budget for pay increases, develop measurable goals, and manage employee performance.
The process begins by writing employee goals and communicating performance expectations to employees.
Involve employees in the goal development process, and you will find that they are more engaged and committed to getting them accomplished.
It is followed by a process of monitoring performance and concludes with a performance evaluation at the end of the rating period.
Don’t wait until the scheduled evaluation to have a conversation.
As you monitor performance, acknowledge when an employee is doing things well and coach them on better performance when they aren’t.
A performance evaluation is not the time for a performance issue surprise.
The length of the rating period (3 mo, 6 mo, 12 mo) is not as important as the consistency in its structure.
If your organization has the policy to sit down with employees every three months, put all the dates on the calendar at the beginning of the year and hold managers accountable for having those conversations.
Many organizations award merit increases annually.
However, if a decision is made to give raises every 18 months or 24 months, that is ok – as long as employees understand company policy.
2. Budgeting
Raise dollars should be budgeted. The annual budget should include merit increase projections.
Use industry-specific benchmark and COLA comparison data to ensure that salary increases are competitive.
While it is important to be competitive with pay increases, be informed so you don’t unnecessarily overcompensate.
Overcompensation is something you probably won’t even know unless you compare your pay structure with what others are doing.
A simple way to check is to use sites like salary.com or professional organizations that provide salary comparison data by industry and employee position.
There may be a cost to access some of this data, but it is worth the investment if you want to make sure your pay practices are fair and competitive.
3. Communication
Effective communication is critical to healthy work environments.
Organizations that strive for high employee engagement should proactively share available pay information with employees.
The grapevine is a powerful engine, and what leadership does not communicate, employees will ad-lib through gossip.
The goal is to share information and answer questions before employees think of asking them.
For example, if revenues are down and a business decision is made to freeze salaries, employees should be made aware of the decision, why it was made, and be included in discussions to improve the bottom line.
4. Show Employee Appreciation
Employees want to feel valued. Be creative with recognizing and rewarding employees.
Find a team of employees to help brainstorm budget-friendly ways to show appreciation.
Things like preferred parking, bonus days off, onsite child care, and continuing education opportunities are just a few things you can do to show employees your appreciation.
The key is to help employees feel appreciated for their hard work!
Every organization should determine the appropriate timing of merit increases.
Begin by developing systems and a process to budget resources, manage performance, and allocate raises based on performance.
This will help you create a culture that achieves objectives and makes employees feel appreciated for all they do!
There are many great books that can help you develop a compensation plan for your employees. Strategic Compensation is one I recommend! Check it out!
