How do I create a salary increase matrix for calculating annual merit increases?

Before you create your salary increase matrix, consider the following as you determine your budget: 

• What is the goal of your merit increase program? 
• Does your organization pay below market, at market or above market?
• If you are below market, do you want to make your organization’s compensation program more competitive?
• If you are at market, do you want to continue the status quo? 
• If you are above market, are you trying to hold down salary growth? 
• What is your organizational philosophy toward excellent performers? What about your substandard performers?
  

Once your merit increase budge is aligned with your compensation philosophy and strategy, consider using one of the two approaches outlined below in determining salary increases.

Broadband approach

If you use a broadband pay structure, you would typically have a percentage increase amount for each level of employee performance regardless of where the employee salary is relative to the midpoint. You would design a spreadsheet with employee ratings on the left side and only one corresponding increase amount for each rating.

You would need to take some initial steps before creating your spreadsheet:

1. Determine the average projected merit increase among organizations for the coming year. Normally, this information becomes available in various surveys in mid-to-late November of each year.
2. Determine your overall salary increase budget.
3. Review your previous year’s evaluations to determine a rating distribution. Find the center of distribution (the rating with the most employees). Assuming that this number represents your average employees, this group will get the median or average increase.
4. Determine the rest of the rating categories (for example, you could use “outstanding,” “above average,” “below average” and “unsatisfactory”).
5. Determine the percentage of total employees in each rating category. For example, 60 percent of employees are in the average performance rating; 20 percent are above average; 10 percent are outstanding; 5 percent below average; and 5 percent unsatisfactory.
6. Apply that percentage to your total merit increase budget to arrive at the increase distribution for each group.

Or you may simply make an educated guess on the performance distribution:

• Performance increase pool amount (total amount available for increases) = 3.5 percent
• Ratings with corresponding increase percentages:
• Outstanding = 5.5 percent to 6 percent
• Above average = 4.5 to 5 percent
• Average = 3.5 to 4 percent
• Below average = 2 percent
• Unsatisfactory = 0

Compa-ratio approach

Another way to approach salary increases would be by using a compa-ratio. The first step when using a compa-ratio is to identify where each employee is relative to midpoint. For example, employees with a compa-ratio of .80 to .89 are below the midpoint of their grade. Therefore, you want to not only reward them based on merit but also provide a higher percentage increase to bring them up in the pay grade. Employees with a compa-ratio of 1.1 to 1.2 are being paid above the grade midpoint. Therefore, their raises will be less. The idea is to provide more internal equity.

On the left side of your spreadsheet, enter the performance level (usually 1 through 5 or “outstanding,” “above average,” “average,” “below average” and “unsatisfactory”). Across the top, enter your compa-ratio segments. For example, you could use .8 to .89, .9 to .99, 1.0 to 1.09, and 1.1 to 1.2. Then in the grid below, assign your percentage increases. Very high performers in the .8 to .89 range would receive the highest increase because they are on the low end of the pay scale compared to their performance, whereas a poor performer in the 1.1 to 1.2 range would receive the least percentage increase because they are on the high end of the pay scale, compared to their performance.