Pay increases

When determining what to pay, the first consideration is the organization’s compensation philosophy and where the position fits within the organization, as determined by a job evaluation.

Employers need to consider the following scenarios when deciding what to pay employees:

  • New hires
  • Existing employees due for an increase
  • Existing employees transferring into a new role
  • Retention: A valuable employee who is considering leaving because of compensation
  • Skill scarcity
  • Local market conditions
  • Organizational budget

An important component in any compensation program is coordinating the annual salary increase budget. This includes cost of living adjustments, market adjustments, promotional increase, and merit increases for the year.

Cost-of-living increase

A cost-of-living increase is offered to employees, regardless of performance, to increase base pay for each role on the salary scale by a set percentage to account for increases in living costs. When this is offered regularly, employees can begin to see it as an entitlement.

Cost-of-living increases are typically issued on an annual basis and given to all employees at a rate recommended by the executive director, approved by the board of directors, and contingent on the overall financial stability of the organization. Cost-of-living increases should be informed by the consumer price index (CPI).

Market adjustment

Market adjustments are typically made following the receipt of market survey data. This data is usually received and evaluated towards the end of either your fiscal or calendar year. Organizations will evaluate their salaries against market data and, if required, adjust base salaries for roles that are below the market. Many organizations have predetermined the percent of the market they want their pay to align with.
If a position in the organization is significantly overpaid compared to the market, some organizations will notify employees and abstain from increasing their pay. In this situation, the employee is considered “red circled,” which means they cannot qualify for any salary increases until their salary comes in line with the market.

This also applies to employees with salaries that fall below the market, and the organization is paying under their minimum range. In this situation, the employee is considered “green circled,” which means there should be an adjustment to prevent higher turnover and difficulty recruiting.

Promotional increase

A promotion is the advancement of an employee to a position that is evaluated higher than their current one. An employee who is being promoted can receive a promotional increase at the time of the promotion that aligns with the appropriate point in the new salary range, based on their performance, qualifications, and market information.

Merit increase

A merit increase is awarded to recognize an employee’s contribution and compensate them for their high level of performance and exceeding expectations. Performance is the key factor in this type of pay increase and can be the factor that moves a person through the salary scale towards the midpoint or higher.

Merit increases can be awarded on an employee’s anniversary date following a formal performance review or at the beginning of a calendar year, depending on your compensation structure and policy.

Bonus payments

A bonus payment is compensation over and above the amount of pay specified as wages or salary. It is only distributed as the organization can pay and/or as outlined in an employment contract.

A bonus payment is used by many organizations to improve employee morale, motivation, and productivity, or to recognize employees who achieve a significant goal. Types of bonuses include: signing bonuses at the time of hire, retention bonuses, and performance bonuses.

As long as bonus pay is discretionary by the employer, it is not considered to be a contract or to carry over from year-to-year. However, if the employer promises a bonus, they may be legally liable to pay it out.

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