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. Second in a two part series.
Consider this example: We took a sample group of 500 nurses in the same position and applied across-the-board raises to some, and performance-based pay increases to others. Each nurse in the across-the-board group received a 3 per cent raise.
We divided the performance pay group into these segments: Top performers received a 3 per cent raise; meets performers, the middle 80 per cent, received a 1.5 per cent raise; and the bottom 10 per cent did not receive a raise, so their salaries remained the same. Review the spreadsheet below for our results:
Notice pay increases over the first year are 1.46 per cent ($262,500) more in the across-the-board group more than the performance-based pay group. In five years, the pay difference is 5.67 per cent ($1,117,674.05) more. When you differentiate your work force you save money and reward achievement. Did the county quoted above save money? Yes, about $6,000.
Could he have saved significant more by rewarding individual performance with a pay increase, most certainly?
A study by Watson Wyatt Worldwide found doing a better job of rewarding employees for good work—and refusing to accept subpar performance—can earn a company a 16.5 per cent higher market value.
Firms that improve their selection and use of health and retirement benefits can increase shareholder value by 7.3 per cent. Linking pay to performance is associated with a 6.3 per cent increase. A company that recognises variations in performance by promoting the most competent employees, helping poor performers improve and terminating chronic nonperformers can boost its market value by 2.2 percent.
A second study by Michael C. Sturman, titled, Using Your Pay System To Improve Employees’ Performance, was designed to show how pay policy directly affects employee performance.
The study shows that employee performance is significantly influenced by two factors: how much money is involved, and how that money is paid out. While merit pay and bonuses yield minimum performance increases, the study points to the relationship between pay and performance as producing the greatest benefit. Having a strong pay-for-performance link with bonuses- not raises- projected a performance increase as high as 20 per cent. Increasing the merit pool by 1 per cent without changing allocation procedures was projected to increase future performance by roughly 2 per cent.
Study after study proves that providing a clear link between pay and performance not only raises future employee performance; it is also an effective means of containing relative costs. Across-the-board raises are easy to implement. However, the question you must ask is this: “Will the reduction in employee motivation and morale be worth implementing across-the-board raises?” The answer is a resounding “No!”

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