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How to Break the Pay Raise Habit?

Q. For as long as anyone in our workplace can remember, we’ve always given everyone an annual raise. Sometimes, it wasn’t much, but at least it showed employees we cared. This year, we want to break this “habit,” but we’re afraid of a very bad, negative reaction from employees when they learn they’re not getting an annual raise.

Any suggestions on how we can do this in a way that doesn’t leave bad feelings for a long time?

A. Never get locked into automatic pay raises. You’re doing the right thing to end them.

Here are five suggestions for easing “the blow” on your employees and helping them understand and accept the change.

1. Decide what your new policy is for determining and giving raises, bonuses and incentive pay. A suggestion: Tie raises, bonuses and incentive pay to:

      • The performance you expect from the employee, and
      • The financial ability of your company or organization to pay.

2. Decide how and when you will determine which employees get raises, bonuses and incentive pay. A suggestion: Don’t tie this decision to an annual review or evaluation. Performance evaluations should be ongoing. Don’t give employees reason to expect that with every “annual review” they get a raise.

3. Consider replacing automatic annual raises with achievement raises and/or bonuses based on performance. Decide for each employee what performance achievement or gain you want. Then decide what that is worth to your business or organization and base the raise or bonus on this objective information.

Example: You want to increase shipments-per-hour and reduce returns. Set your target improvement goals in these two, related areas, for employees in shipping. Tie bonuses to the employees’ achievement of these goals.

There are two advantages to using bonuses. Employees get more immediate reward for achieving a goal or making a gain. And you’re not locked into the increase in pay for a long period.

Example: A fifty cents-an-hour raise costs you $1,040 a year, year-after-year. On the other hand, a $250 bonus, paid four times a year, costs you $1,000, but only for as long as the employee achieves the performance or gain you want.

4. Inform your employees about the changes in your raise policy, and the reasons for the changes. It’s important that your employees know why the changes, and your new system, are better for the long-term financial health of the organization, and better for motivating and rewarding exceptional performance. Note: This is the trouble-point. Employees who have come to expect an annual raise as a “right” will have a difficult time accepting the loss of this “right.” Explain the reason or reasons for the change in candid and when possible, positive terms.

5. Give employees plenty of advance notice of the change. For example, provide notice of a minimum of three months or as much as 12 months.

reprinted with permission from Thomson Reuters 06.2021  This article is not to be considered as legal guidance, at all times ManagedPAY recommends you speak with your attorney and/or tax professional.

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