Most “Cost of Living Increases” are woefully mismanaged.
I get questions frequently on annual payroll increases. This year, 2008, the national average is hovering around 3.9%. You can see my article, same subject, for more detail.
A company, however, simply cannot continue to increase payroll in a vacuum.
All businesses can increase prices. And frankly, all businesses must do so on a regular basis. “Readily” and “successfully?” Depends on how they’ve been managed to that point.
Prices must rise, or companies go out of business. No organization can — successfully — continue to give pay raises each year, and absorb other inflationary costs, without raising prices, or finding a corresponding (or greater) reduction in operating costs.
Those businesses without a larger strategy lay off and “cut back” first; they eventually, however, increase their prices.
Margins must be maintained over time — no other way about it. Even in commodity and/or intensely competitive environments.
So, given a 3.9% increase in total payroll costs, what should you do with that?
My payout recipe…
- Identify my top 10%. They’ll see 7-10% increases in pay.
- Average to “below top 10%” will see around 3-4%.
- Below average will get coal in their stocking. Those improving will be comforted, those declining can pound sand.
Frankly, and this is something of a different way of thinking, I know, but… I can argue that average performers don’t really deserve more money, unless market ranges have truly shifted — and you should know that “market” ranges do not move lock-step with inflation, CPI, or any other such economic driver.
If we had the courage to consistently pay “at,” or even better, “slightly above” market, then average performers are already correctly paid, and should only be adjusted when we adjust market-based ranges in total.
Of course, like all performance and reward issues, this can’t be done in a vacuum, but needs a process in the organization to support it, including performance management, development, and front-end expectation-setting.
But that’s just me…
