Good question. And certainly relevant to the new economic climate. Companies look at pay raises in a couple of ways. Some companies use the performance appraisal as the tool from which they base pay raises. Other companies give across the board pay raises to their employees regardless of performance. I am a believer in tying performance to pay increases. If you don’t, it tends to lead to performance mediocrity. If the pay raise is a blanket pay increase then what is the motivation for employees to perform? If regardless of effort employee A is to receive the same raise as employee B, then the company runs the risk the employees will eventually titrate their performance to the lowest level possible to get a pay increase. By tying performance to pay, it is also an incentive for top performers. Top performers are usually people who do well with established goals. They want to know what it takes to get a better job, a better raise, etc. Performance appraisals, if done correctly, establish those benchmarks upfront. The employee can see what it will take to move to the next level and begin to strive to get there. If they don’t make it, they know prior to the performance appraisal meeting which leads to a more positive working session versus a meeting where the manager and employee are at odds about whether or not the employee met the goals.
Companies should devise a system that is fair and equitable to all of their workers, so it doesn’t discriminate against anyone or any group. There are many methods that can be used to evaluate performance including job ranking, job classification, factor comparison and point- factor comparison. Some of those methods are quantitative and some are not. When establishing a system for a small business, always start with making sure the position’s job description outlines the goals and objectives for which it was designed. Once that is confirmed, take the expectations listed in the job description and the training objectives the employee achieved, along with other factors, to develop a list of criteria upon which the employee is evaluated. From that information areas upon which the employee’s performance should be evaluated can be determined. When tying the performance review to a pay raise, there should be an established maximum amount of money (as a percentage of the employee’s annual salary) that will be given if they have a superior performance. Anything below that will be a percentage of that amount. (For example, if the company will give up to a 5% increase for superior performance, then the employee who has just simply met their goals would get a 2% increase.) To ensure this system is fair to all, it should be reviewed by the company’s legal counsel prior to being rolled out to the management and employees.
Performance is the key to the business success. Organizations that tie pay raises to the performance of the employees find employees are more productive and more effective.