Across-the-board raises increase cost and reduce performance

Organisations that continue to use across-the-board raises as an easy and effective way to control compensation costs and reward employees soon find out the truth. Yes, it may be easy- but it is not an effective means of controlling costs and rewarding employees, especially over the long term, writes Rod Waddell. First in a two part series.

Employee pay is a key tool in fulfilling many corporate objectives. Among these are: attracting top performers; maintaining employee satisfaction; ensuring strategic alignment; increasing performance; and encouraging innovation. However, Robert Heneman, a noted compensation consultant says, “The ultimate goal of a pay system is to align the goals and interest of employees with the goals and interest of the organisation.”  How do across-the-board raises help achieve this? 
First, it’s important to recognise that most top performers are driven by achievement.  Since achievement is an internal motivator, organisations can harness its power- as well as the power of other internal motivators- by setting clear goals for individual and team performance. Management by Objective is one way organisations have found to tap into the power of motivating employees to achieve. Across-the-board raises are not based on achievement, and so they miss out on harnessing the influence of a powerful internal motivator. Top performers would rather work in an organisation that recognises and rewards both their achievements and the effort that goes into them.
Over the last few years, several federal organisations have raised the salary range for many of their employees. This was done primarily as an effort to both attract and keep high achieving employees. Is this a workable strategy producing positive results? We think not.  As stated previously, most high performers are motivated to achieve. Without a system that rewards their efforts, one of two things almost always happens: Either the high achiever leaves; or there is a noticeable drop-off in achievement. Instead of a race to the top with appropriate rewards for those who make it, across-the-board raises turn beneficial competition into a race for mediocrity. 
Are across-the-board raises effective in helping maintain employee satisfaction? Good question; iffy answer. There are two ways to allocate across-the-board raises, either through using a set amount or through using a percentage of salary. Some employees respond positively to the first method, others to the second. A flat cash payment typically produces a more favourable impact on low paid employees than it does on higher paid employees. Here is one example that was reported this month in The Tribune-Review. An article by reporter Liz Zemba features this quote:
“County Manager Warren Hughes said the total approximate cost of the $1,000 raises is $84,000, compared to $90,000 for the three percent raises. At the same time, the $1,000 raises help lower-paid employees who otherwise would have had smaller increases under the three percent scenario.”
Then there are organisations that believe across-the-board raises help control costs. Sadly, they are mistaken.

Read more next month.