As companies begin to recover from the pandemic, several owners have come to the WhyHR team asking about giving employees an annual raise. Our message to them, and to you, is it’s time we flip the script on our thinking about salary and incentives. Now is the time to move away from the mentality of required annual raises and toward a structured system of incentives and bonuses. One of the clear lessons of COVID is that building a system based around annual increases is ultimately unsustainable. We need to ask ourselves what a better system looks like.
Why annual raises are problematic
The expectation of annual raises can be problematic for several reasons. First, it creates a situation where employees are rewarded simply for remaining at the company for long periods of time, regardless of qualifications, skill, or effort. We know that a new hire may walk into our doors tomorrow and do the same job with far more skill than an employee who has been with the company for a decade. Under a system of annual raises, the new hire will be paid far less than the long-time employee, and the new hire may even take on more work due to their skill level. In that scenario, the highly skilled employee probably isn’t staying at your company for long because they’re going to get a better offer.
The pandemic exposed another danger in the expectation of raises. When a crisis comes and costs must be cut, you cut directly into the salary that your employees rely on to pay bills and live. These cuts affect both your employees and the entire culture of a workplace.
How incentive or bonus structures are different
A successful transition to incentive or bonus structures begins with a much wider shift in how we view and set salaries. Salaries should be based on the market value of a position, and employees should be paid what the position is worth. Rather than length of employment being the determinant of increased salary, a bonus or incentive structure rewarding performance and added value should be layered on top of the standard salary.
This plan addresses both problems with annual raises mentioned above. A new hire in the same position has the same ability to earn incentives as an employee who has been around for many years. When a crisis hits, missing bonuses or incentives feel different for employees than slashing their salary. When employees feel more secure that their salary is safe even in challenging times, it can ultimately lead to a higher retention rate.
One key element is that the incentive or bonus structure must be in place for the entire company, not just the top earners. While there are various designs in how this looks depending on the company, it is important that all are included and that it works at every level. Spend the time to design it well and get it right.
As always, communication is key
Once a new incentive structure is created, the narrative surrounding salary and bonuses changes, as do expectations. Taking the time to ensure employees have a good understanding of how incentives work is key to getting employee buy-in.
One area that requires transparency and honesty is the fact that incentives and bonuses will fluctuate based on good times and not-so-great times. Every business goes through cycles, and sometimes business performance overall will be lower. Not every month can be an incredibly profitable month. Some are average, some are poor, and that’s to be expected.
Being transparent with your staff about this may feel vulnerable or risky, but it is necessary for their understanding that smaller bonuses one month do not spell doom for the entire organization. Let them know that they are on this ride with you, in the good times and less good times. That said, remind them of the security that lies in their salary being set properly and remaining untouched, even if bonuses are put on hold for a time.
If you are beginning to consider changes to your pay structure, reach out to WhyHR for help as you create an incentive-based program.