“If someone is doing well and you give them 3% and someone is mediocre and you give them 2%, it’s really only a symbolic difference,” says Shari Stier, vice president of global human resources at Pact, an international development firm. “It’s a big challenge in HR.”
The average merit pay raise has stayed around 3% for the last five years and surveys show that companies are not likely to stray from that percentage, especially with inflation remaining low. Employers could just increase the average for everyone, but that doesn’t necessarily translate to star performers getting a higher bump than the average worker.
Going over 3% also means that employers would have to absorb higher overall payroll costs. And that may force them to pass on the increase to their customers to absorb, says Tom McMullen, a senior compensation partner with Korn Ferry Hay Group.
So what is an employer to do? “Eliminate merit raises as we’ve known them,” says Laura Sejen, managing director of talent and rewards at consulting firm Willis Towers Watson. Instead, firms should focus on rewarding their best workers with higher bonuses, she adds.
“It’s an idea that I’m trying to engage companies in,” Sejen notes. Stanford, Conn.-based Novitex Enterprise Solutions decided three years ago that it would ditch the annual pay raise unless employees proved they deserve it. “The reality is, not everybody is getting a raise,” the firm’s chief HR officer, says Theresa Mohan. Some top performers at the company have seen raises of 10% or higher.
General Electric also is considering eliminating annual pay raises, Bloomberg reports. “We uncovered an opportunity to improve the way we reward people for their contributions,” Janice Semper, GE’s head of executive development, told Bloomberg. Semper notes that it would involve “being flexible and re-thinking how we define rewards, acknowledging that employees and managers are already thinking beyond annual compensation in this space.”
Kris Duggan, CEO of San Francisco-based BetterWorks, an information technology and services provider, notes they are “looking at salaries every couple of months to make sure we’re paying fairly,” the Society of Human Resources Management (SHRM) reports.
“An annual [raise] is an old-school way of thinking based on the assumption that employees plan to stick around for five to 10 years,” Duggan says. “If you wait an entire year [to review compensation], you might lose employees who don’t want to wait for a [raise]. If we hire an engineer at a certain price point, we evaluate how much we’re paying our other engineers to be sure we’re always paying fairly.”
But doing away with the standard annual raise may not sit well with the majority of a firm’s workers, Steve Gross, a senior partner at Mercer, tells The Wall Street Journal. Dishing out nice raises only to your star employees may “antagonize the bulk of people who get the work done every day,” he says.
Still, if the point of annual raises is to motivate employees and keep them from leaving for another employer, then they have failed, Bloomberg reports.
The best employees are landing 5% annual raises, but that does little to inspire when the average employee is expected to get a 3.1% raise this year. “You can’t really do a lot with the annual raise,” says Evren Esen, director of survey programs for SHRM.
Companies are especially challenged now as the supply for skilled workers in certain industries has become tight. Unless a company can offer a standout employee a promotion, one way to provide a substantial boost in salary, they have to deal with the prospect of that employee leaving for a better opportunity.
Firms like Adobe Systems Inc., Accenture PLC and Gap Inc., have ditched their annual performance reviews that were used as the basis for awarding raises. These firms found that giving workers a small raise every year based on an annual review was a poor way to recognize performance. And a recent survey by Willis Towers Watson showed that managers acknowledged giving their poor and outstanding employees the same rating, according to Bloomberg.
That survey found that more than 25% of 120 employers surveyed rewarded employees with performance-based bonuses who “fail to meet expectations.” Most managers also rated bad employees as meeting or surpassing expectations, Willis Towers Watson's Sejen says. “There is this whole sort of entitlement mentality that’s built up around merit increase."