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Exercise Caution as Salary Budgets Inch Up Again

Average Salary Budgets increases

As the economy continues its steady--if slow--improvement in many areas, some employers may be tempted to "spread the wealth around" after several lean years of limited raises and bonuses. Yet this might be precisely the wrong time to do that, warns the leader of the compensation practice for WorldatWork, a trade group whose ranks are heavily represented by compensation professionals. Here's why.

As the accompanying chart illustrates, salary budget increases are

projected to average around three percent this year. That's still nearly a percentage point below pre-recession levels, before they registered their steepest decline in the entire 38 years the organization has been conducting its survey, according to WorldatWork's Kerry Chou. He does not anticipate any significant growth in salary budgets in the near term.

The trick, he says, is getting the most bang for your buck. And for Chou
and many members of WorldatWork, that means concentrating raises on the highest performers. "We're supportive of a pay-for-performance philosophy, and we encourage organizations to get that differential (between high and low-performing workers) to be as high as possible," Chou says.

While that may not sound like a radical prescription, the calibration of
different raise levels has changed at many organizations, or may need to if it hasn't already. Also, opportunities to make an impact with end-of-year bonuses remains an important option for companies that have already given out a lot of raises at the beginning of the year.

Five Performance Tiers

For salaries, says Chou, think of a basic five-tier performance rating scale,
where one is for employees not meeting expectations, two for employees only partially meeting expectations, three for the middle of the pack, four for strong performers and five, "you're walking on water."

Whereas the lowest level performers would rarely get a raise (and
appropriately so), the "two" level employees often would at least get a token raise at many organizations. Today, even under somewhat more relaxed conditions, that may no longer be appropriate, to conserve precious salary budget dollars for the fives and fours, Chou says.

In its annual survey WorldatWork asks members how much higher than
the average raise the high performers receive. The most common response is 50 percent, so that a strong performer might get 4.5 percent if the average is 3. But about one fourth of members say their differential is 100 percent -- a position Chou applauds.

One way to enable larger differential is "carving out" a portion of the overall compensation budget for discretionary use with high performers. Instead of, for example, giving managers a three percent increase to apportion among those they supervise, "reduce it to 2.5 percent and save the extra half a percent for special cases," Chou says. The same principle applies to bonus pools, although those amounts may need to be predicated on actual business performance.
Average Salary Budgets increases

The Value of "Carve-Outs"

"The nice thing about these carve-outs," Chou says, "is you don't have to
change your processes." That is, if raises and bonus awards are determined by a set of goals and performance criteria known to employees, those can remain the same. However, it's important for employees to know early in the game if the size of the basic bonus pool has changed from the prior year.

"Employees have an expectation about what they are going to receive. It's
important to do as much communication as possible, so they have realistic expectations," Chou advises.

But then when high performers get the benefit of higher raises or
bonuses financed by the carve-out, you will exceed their expectations, providing a stronger motivational boost.

And that may be critical to keeping employees who are, in Chou's words, "hitting the ball out of the park." With an improving economy--or even when it remains relatively sluggish, employers cannot afford to be complacent about the prospect of losing their best people. "Those employees are always going to have opportunities, and you may lose them if you're not paying attention," Chou concludes.

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