And Now, a Word About Salary Increases

Delivering paycheck news is part of HR’s role.

By Lin Grensing-Pophal, SPHR Nov 1, 2008

Recent forecasts of salary increases that employers plan to make next year have been mostly around 3.5 percent to 4 percent, about even with the rates of pay raises awarded for 2008. Whether that's good news or bad, however—especially with the U.S. consumer price index showing annual inflation at or above 5 percent some months—may depend on how employers convey their salary increase plans to employees.

Even though projected salary increases for many employees may fall short of increases in the overall cost of living, the positive message for many is that at least their increase rates won't slip much if at all below this year's. Says Laura Sejen, global director of strategic rewards consulting at Watson Wyatt, "Employees will view holding merit increase budgets steady as a positive sign that will help them offset inflation and higher energy and food costs."

Despite those prospects, concern about the economy is creating anxiety for employers and employees alike, says Matt Riley, HR director at Bruegger's Enterprises Inc., a bakery-cafe chain with nearly 300 locations in 23 states. In his view, however, the level of concern relates to the climate within each organization.

Citing his company as an example, Riley says, "We're not in the position I think some companies are in where they may not be able to pay increases or may be looking at downsizing or eliminating positions. We're intending to stay competitive, and we're intending to keep the people that we've got in order to do that. We need to be mindful of keeping a competitive wage increase."

But even executives with companies in strong financial positions should be thinking about communicating with employees to ensure that there are no misconceptions, Riley continues. Throughout the media nationwide, reporters forecast a gloomy picture of compensation trends, he says. "Our team members are getting a negative message." He advises HR professionals to counteract that negativity "right now."

Similar principles of communication apply as well to leaders in companies that are feeling a financial pinch, experts say. Communication can be especially critical for those employers to stem rumors and the subsequent exodus of staff.

On issues of pay, communicate sooner rather than later, experts say. In addition, ongoing conversations about pay issues can help establish trust and pave the way for what may be bad news.

Kerry Patterson, co-author of Crucial Conversations (McGraw Hill, 2002), notes that in the absence of information, rumors will fly. Employers need to be filling the void with facts regularly to avoid misperceptions as to whether the news is positive, not so positive—or grim.

When Silence Isn't Golden

HR professionals may hesitate to share information for various reasons. Avoidance is one, says Robert Cartwright, president of Intelligent Compensation LLC in Pflugerville, Texas. If the discussion would contain dim prospects for pay increases, he says, "companies will try to ignore it as long as they can."

Some leaders may fear that if they tell employees that times are tight, the best ones will start looking for jobs elsewhere. That doesn't necessarily happen, according to Patterson. He has seen instances where voluntary turnover actually decreased after such an announcement. "We're working with adults, and they want information. Typically, there is no reason to withhold it," he says.

Company leaders may withhold information in the belief that they are acting in their employees" best interests, Patterson says. He tells of a company whose leaders knew in November that they needed to cut salaries but decided not to tell employees until after the holidays so as not to spoil the season for them. But that decision backfired on the employer, he says, when the announcement was made in January at an all-hands meeting and an employee asked, "How long have you known about this?" The answer that the company "had an indication" in November didn't go over well with the group.

Keep Communication Lines Open

"Tell it all; tell it now" should be the communication model on issues of pay, according to Patterson and others.

In addition, communication about pay shouldn't be an isolated occurrence when times are tough, Riley says. "Have ongoing conversations with your management team members about the financial performance," he says. Then those conversations need to trickle down through the organization consistently and directly.

"The compensation conversation is really a personal one and is most effective when it comes from your direct supervisor," Riley continues, adding that "You have to have that compensation conversation more than just once a year."

Rebecca Elkins, SPHR, of Dallas-based Elkins Consulting LLC, agrees. Have 'some kind of regular meeting, even quarterly," she says. The meetings should be led by the chief executive officer or another member of the leadership team, and responsibility may rotate, she says. "I've worked for companies that have done that through all-employee meetings that may even be done through teleconferencing, but it's always been very impactful to me. It has helped loyalty a lot to have your CEO or a member of his or her team there saying, ‘This is how this last quarter went, here are the things we're working on and here's the outlook." If you have a bonus plan, talk about how that's tracking."

Regular meetings allow for "face time" with leaders and opportunities to ask questions, Elkins says. She adds that companies can consider other forms of communication such as newsletters and intranet sites. "Even if it's not the best news, employees want to know."

Messages about pay need to come from the top of the organization and employees" individual managers, Elkins continues. When the CEO or top HR leader explains "the basis for why the merit budget is going to be what it is" and gives some historical perspective, she says, "it helps to set expectations and gives [employees] some background, and it makes it a lot easier for the manager to have their one-on-one discussions."

Targeting the Audience—And the Raises

Whatever the message, keep in mind that it should be tailored for the specific audience. For example, top performers need to hear about more than the money, Elkins says. "In most studies, opportunity for career growth is still a No. 1 need," surpassing even money as a motivation for staying at an organization, so "taking the time to spend with people has a lot of value."

Says Cartwright: "You'll also see more organizations really trying to get better at performance management and truly rewarding those who are performing. With food and gasoline and inflation creeping up, employers are in a tough spot.

'smart organizations are going to pay their top performers first because those are the ones that are making things happen for the organization. True performance management really looks at what is driving the organization to excel. What are the key metrics? What's the level of value of individual or collective contribution? Who has line of sight to make things happen?"

Don't just worry about top performers, though, Elkins notes. "The toughest audience is going to be your on-target performers," who make up about 80 percent of the workforce. "Your outstanding performers, you're going to find some money for. Your low performers—you're not that worried about [them]. It's the on-targets that really get hurt. They've met their objectives, they've done exactly what you told them to do and they're just getting 2 percent."

Elkins cautions, "Your biggest risk could be demoralizing these people." Engagement with this group is critical, she says, and she recommends that managers spend time with these employees one-on-one to talk about opportunities and the outlook for the future.

How To State the Case

During the process, it is permissible for leaders at any level to let their feelings show to some degree, Patterson says. "While you don't want to look unprofessional, you also don't want to appear stiff and uncaring. Tough decisions are often emotional, and it's OK to show your emotions."

Suzanne Bates, president and CEO of Bates Communications, an executive coaching firm in Wellesley, Mass., and author of Speak Like a CEO: Secrets for Commanding Attention and Getting Results (McGraw-Hill, 2005), suggests:

Communicate early on. If salary increases and bonuses are tied to performance, start early in the year and let people know what's ahead. They should receive a general idea of what's going on in the business, where things stand, how the year might go and what your plans are. They should also know what it will take for the business to support raises and bonuses.

Set clear expectations. Employees are most motivated when they are told precisely what they have to do to get a raise, promotion or bonus. People want to apply their talents, contribute in an important area and be a valued part of the organization. Spend time thinking about what it will take, and then tell them.

Give regular feedback. Nothing is more demotivating to employees than working hard all year in the belief that they're doing a great job, and then being blindsided at bonus and raise time when they don't receive the compensation they think they deserve. Many managers make the mistake of skipping or shortening their employees" quarterly reviews, which are important forums for guiding your team and setting expectations. Use them to connect with employees, to see how things are going for them and to provide candid, on-target feedback on how they are doing in comparison with expectations.

Be honest and forthcoming. If times are tough and salary increases are not in the cards, or if increases will be minimal, you need to be straight with your team and each individual about what's happening in the business. Share the reasons why you have to hold the line on costs. Let them know how they can contribute to making the business more profitable. People will be motivated to work hard even without a pay increase if they think you're all in it together and are heading in the right direction.

Be a leader who motivates and aligns people with purpose. Employees come to work not just for a paycheck but for a purpose: Everyone wants to contribute; everyone wants their life to matter. Work is one of the ways people discover their talents and purpose in life. The leader who can align people with a powerful vision and mission will have a loyal workforce because people who are working with purpose and passion are highly motivated. This is how you harness the energy and talent of the organization.

What Really Matters

Bates says pay raises, while important, are not the only motivating factors for employees. "Once people meet their basic needs and have money for what is important to them, such as vacations and their children's education, studies show they look for other rewards at work.

"While raises and bonuses are one way we measure our success, people also want to brag that they work for a great company, they want to be involved in fascinating projects, they want to learn new skills and work with people they respect and enjoy, and they want to do something that matters or makes a difference."

The compensation conversation needs to center on a clearly communicated philosophy, Riley says. "It's a whole package, and it's not just about sending out the memo that says, ‘In these tough times, we're doing X, Y and Z." It's really about how you communicate every day."

The author is a Wisconsin-based business journalist with HR consulting experience. She is the author of Human Resource Essentials: Your Guide to Starting and Running the HR Function (SHRM, 2002).

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