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Out-of-Cycle Salary Adjustments Can Undercut Pay for Performance
There are repercussions when managers increase an employee's base salary out of cycle, without a change in grade or level

By Michael Sgarlat, PHR  10/1/2009
 

How often have you heard the words:

Since Jane is taking on additional responsibilities, I want to give her a salary increase. How does HR feel about this?”

Whether in struggling or strong economies, it's often easier to allow one-time base pay increases for employees with heavier or altered workloads nonchalantly than to argue with the requesting manager. Unfortunately, if left unchecked, these allowances can destabilize the effectiveness of a well-defined pay-for-performance system — or worse, create a pay practice that disadvantages a protected class.

Knowing when, why and how to award salary increases without a change in grade or level is vital to upholding the goals and values behind pay-for-performance practices.

Measurable Performance?

Most pay-for-performance plans are simple in theory. A manager and employee sit down and discuss the objectives the employee needs to accomplish for a given time period — frequently referred to as a scorecard. The manager and employee sign the scorecard, acknowledging that the objectives are fair and measurable. Whether the employee accomplishes these objectives determines the pay he or she will receive.

This is the standard practice in an organization using a pay-for-performance model. When HR professionals allow out-of-cycle adjustments into the mix, they devalue this structured performance process. As such, the employer is no longer rewarding accomplished, measurable performance, but instead paying for the anticipation of success.

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Out-of-cycle adjustments can devalue
the structured performance process.
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Unfortunately, things don’t always work out the way the management team foretold, as no one can predict the future. It’s important to always keep in mind that it’s far easier to give people money than it is to take it away. For this reason, it is risky to award an increase in compensation for newly assigned tasks that have yet to be completed.

Going Around the System

Another common situation: When facing hiring freezes, lower merit increases, and companywide decreases in bonus budgets, managers often attempt to reallocate dollars from other areas within their departments in order to reward certain employees. They try to justify this behavior to HR by claiming these employees are performing additional tasks that call for an adjustment to their base salary.

But such attempts to circumvent the companywide reduction in merit reward dollars can create the perception of preferential treatment and undermine the intent of the merit process.

For instance, one-time adjustments are difficult to quantify and handle equitably across different groups. As they do not typically apply consistent metrics and amounts, pay practices that are less advantageous to a protected class can occur, even when there is no intent for such disparate treatment.

If HR reviews how pay is distributed over the course of a given year and discovers one class receiving lower merit increases but higher "compa ratios" (i.e., base salary relative to midpoint) because of salary increases, HR would be wise to study further, as this could be an indication that there has been discrimination.

Common Justifications

Another popular rationale used by managers for out-of-cycle base-salary adjustments is:

“We hired Jim with a low salary for his division, but he is performing at the same or a higher level than his peers. Can we give him an adjustment to make his compensation equal to that of his co-workers?”

This might seem to be a quick and easy solution, but it's not necessarily the best one. The ideal resolution to the problem is to adjust Jim's salary over time using the performance management and merit process.

Most merit matrices link an employee’s placement in the salary band (or relationship to the midpoint) to the merit percent he or she will receive based on their performance rating. If Jim continues to have high levels of performance, he will eventually move up to the same level as his peers.

Lettie Longoria, senior HR manager at Kinetic Concepts Inc., once advised, “Always tell managers to take off the rose-colored glasses and look at sustained performance as opposed to how they feel about the employee right now.”

When a manager requests HR’s input on an adjustment based on expanded responsibilities, there are multiple questions HR must address. One consideration is whether these additional responsibilities will be temporary or long term. The last thing HR wants to do is grant a salary adjustment for an employee’s increased efforts only to try and retract it when those efforts are no longer necessary or part of the employee’s job.

In that situation, if a salary retraction does not occur, the employee runs the risk of being perceived as overpaid. This then becomes problematic for the employee, as it could place him or her at greater risk of termination.

Other questions to ask the employee's manager include, “How much will these additional responsibilities change the job? Do these changes necessitate a higher grade?” It might be that the manager's proposed increase in the employee's job expectations best calls for a promotion.

Unfortunately, many managers make the mistake of promoting employees before ascertaining whether they can perform the job tasks that justify higher compensation. The same issues apply to increases in base salary without a change in grade. What happens if an employee does not succeed?

HR professionals should advise managers that the best practice is to first add additional responsibilities to the employee's performance-management scorecard. If after witnessing sustained, successful performance with the new tasks, an out-of-cycle salary increase might be appropriate. Performance of the new responsibilities going forward can then be evaluated by HR and management, in accordance with the pay-for-performance model.

Other Considerations

There are many good business reasons for prescribing why and when to adjust salaries out of cycle. An increase in salary should not be used regularly, for example, to entice an employee deemed a flight risk to stay. If flight risk becomes a common reason for adjustment, hiring guidelines and pay practices for new hires, as opposed to individual compensation, should be reviewed and changed if necessary.

Management and HR should always ensure that salary adjustments are warranted and based on merit. If, on inspection, it becomes apparent that arbitrary salary increases show evidence of a manager's prejudiced tendencies, it is important to address the issue promptly to ensure compliance with all applicable laws, rules and regulations and to avoid potential litigation.

To sum up, an adjustment to base salary without a change in grade or level is a quick-fix solution. But even when things are moving at a fast pace, the quick fix is not always the right fix.

Michael Sgarlat, PHR, is a compensation analyst at Kinetic Concepts Inc. (KCI), a medical device company with headquarters in San Antonio, Texas. (The views expressed in this article are his own and do not necessarily reflect those of KCI.)

Related Articles:

Avoiding 'Pain for Performance': How to Effectively Design and Implement a Pay for Performance System, SHRM Online Compensation Discipline, September 2009

The Problems with Pay-for-Performance Plans—and What to Do About Them, SHRM Online Compensation Discipline, January 2007

How Kimberly-Clark Ties Pay to Performance, HR Magazine, November 2006

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