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Paying for performance and 2014 raises: What others are planning

November 1, 2013

A new survey looks at how employers are setting their salary budgets for 2014. Based on survey results, it appears that most employers expect to hand out raises similar to those given in 2013. In other words, the planning indicates it will be “more of the same for next year.” This is not necessarily a good thing. Keep reading to see some analysis of the numbers involved in this important issue.

Job performance matters. But at your organization, does it matter enough when the time comes to hand out raises? The latest General Industry Salary Budget Survey of 910 employers from Towers Watson Data Services indicates employees whose performance ratings are below average can look forward to raises next year in the 1.3 percent range, which is slightly below the projected national inflation rate (based on the Consumer Price Index).  

This 1.3 percent figure for below average performance is the same across categories, from non-exempt employees to managers and executives. This suggests one of two things.

Respondents to the survey have confidence their under-performing employees and managers have the potential to improve their performance and will improve in the future, or

Respondents simply don’t have the stomach to “punish” under-performers by giving them no raise at all.

Yet taking this more hard-nosed no raise approach, particularly in a low-inflation, relatively high unemployment environment, would convey a stronger message that under-performance is not taken lightly, without being unduly harsh.

How Average is Average?

In addition, as the table below indicates, employers are rating fairly high numbers of employees either as top performers or above-average performers (combining those two categories). The proportion of employees receiving “below average” ratings is much smaller. This pattern is reminiscent of Lake Wobegone of Prairie Home Companion radio show fame, where everybody is above average.

             Employee Performance Rating Distributions by Job Category
Performance RatingMgmt & Executives
 Exempt Non-Mgmt
Non-Exempt Salaried*
Non-Exempt Hourly
Highest possible 14% 11% 10% 10%
Above average 31% 28% 26% 24%
Average 51% 56% 57% 60%
Below average 4% 5% 6% 6%
* Total equals 99% due to rounding error.
Source: 2013 Towers Watson General Industry Salary Budget Survey

Also noteworthy in the table above is the relative similarity of the performance distributions by job function. The one exception is the management/executive category, which has a significantly higher distribution of combined above-average and highest possible performance ratings.

Modest Raises for Top Performers

Projected 2014 raises for employees by job performance rating, as shown in the table below, also reveals a general consistency in the planned percentage-of-salary level of raises for each of the four basic job categories. The numbers are remarkably similar to raises granted this year and in 2012.

                      Projected 2014 Employee Raises by Job Category
Performance RatingMgmt & Executives
 Exempt Non-Mgmt
Non-Exempt Salaried*
Non-Exempt Hourly
Highest possible 4.5% 4.6% 4.5% 4.3%
Above average 3.5% 3.6% 3.5% 3.4%
Average 2.6% 2.6% 2.6% 2.5%
Below average 1.3% 1.3% 1.3% 1.4%

Source: 2013 Towers Watson General Industry Salary Budget Survey

According to the table above, projected raises for top performers are not even double those of average employees, at these companies. This approach may be a mistake. At the Fortune “Most Admired” companies, top performers received raises triple those of average performers. Where the “raise gap” is narrower, incentives to work harder and smarter are narrowed as well. Also top performers — assuming they are rated honestly — are the ones you can least afford to lose. Not only does their performance matter in and of itself, but top performers set the bar higher for everyone else, by their example.

Raises Not Only Factor in Retention

Giving out large raises to those who perform well is not the only thing you need to do to retain them, of course. You can have high turnover rates regardless of the competitiveness of your salary and raise levels if you have deficient supervisors. In fact employees often quit because of workplace environment issues rather than pay — although a low pay raise may be the last straw for top performers who are unhappy with their jobs for other reasons.

Additional highlights from the Towers Watson Survey:

Budgeted 2014 pay raises are remarkably similar by job level; the average is 3 percent, with the highest average (3.1 percent) for executives and the lowest (2.9 percent) for non-exempt hourly workers.

The average company is projecting the additional cost to their salary budgets in 2014 due to employee promotions will be 1.4 percent of their entire salary budget.

Projected discretionary bonuses to be awarded next year will average 18 percent of salary for executives, 9 percent for non-executive managers, 6 percent for exempt non-managers, 5 percent for non-exempt salaried employees and the same level for non-exempt hourly workers.

If you are scratching your head trying to fairly divvy up a small budget for raises, it might be time to consider not just what you feel you have to do to keep employees happy, but consider what you are trying to accomplish, what performance you are hoping to reward and encourage, and proceed from there.

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