By: Jen Hubley Luckwaldt, PayScale.com
For many businesses, especially smaller companies, salary negotiations and salary increases can be fraught with peril.
Offer too much, too soon, and you can upset a carefully balanced budget; offer too little, too late, and you can lose your best employees.
As a result, many average salaries often lag at small companies, given the lack of a compensation plan to reward the very performers that will help them achieve their business goals.
"Too many companies people adopt a 'peanut butter approach,' where they say, 'I don't want to think about this. I'm just going to spread it out evenly,'" says Stacey Carroll, compensation expert for online salary database PayScale.com.
"We also call it 'thanks a latte,' because by the end of the day, once you spread out that little tiny bit that you have to work with to everybody, it equates to about a latte a paycheck."
The irony of this approach is that it often alienates top performers, says Carroll. And at the end of the day, those are the last employees that companies want to lose.
When determining how and when to award salary increases, companies should examine a variety of internal and external factors when negotiating compensation.
Factor 1: The Market
In order to stay competitive, Carroll advises that companies look at how much the market is paying for a given position and job skills to best determine a salary increase.
This is often more complicated than it appears, because the market changes at different rates for different positions.
Recruiting for IT skills or other specialized skills, such as a physical therapist, might find their skills in greater demand than an employee with a different background.
"Pay is really not different than your most fundamental economic model," says Carroll. "Which is that as the demand for certain job skills goes up and the supply goes down, the price or the wages also go up."
Factor 2: The Value of the Employee to the Organization
Keep in mind as well that an employee might be more valuable to you this year than last year.
They might be more proficient at their job, have greater knowledge of your operations, or have built relationships with clients that are worth more to your company's bottom line.
Carroll cautions that this metric is somewhat subjective. It's easier to find data on the market, and harder to determine the actual value of the employee to your company.
One thing companies should not do is think in terms of employee turnover costs.
Companies often try to quantify the value of an employee by considering how much money it would cost to recruit for a replacement, review resumes, interview candidates, and train them for the position. They might even add in the "soft costs" of lost productivity among the rest of the staff.
"At the end of the day, the goal really should be to not even get to that point," says Carroll. "The goal should be to figure out how to reward people in a way that increases employee motivation and creates an engaged workforce."
Factor 3: Managing Employee Performance
One thing companies should never do is to reward people for complaining about their current compensation.
"It’s the old adage of, ‘You teach people how to treat you,’ right?" Carroll says.
"And so as an organization, if what you're doing is just responding to all the grumpy people, or the squeaky wheel, what's going to happen is that you're going to turn out a bunch of squeaky wheels."
Instead, companies should reward top performers and good team members.
Carroll feels so strongly about this that she advises companies to spend more of their compensation budget on merit increases -- and skip the cost of living adjustments altogether.
“There's this notion that if our housing costs more, and our fuel costs more, and our groceries cost more that our employees should be earning more money. And unfortunately, that's not a real strong business argument. We should be rewarding our employees and incenting them to help us, as a business, drive business results."
On the other hand, Carroll is not opposed to breaking the review-raise cycle to incent an employee that has proven to be a top performer.
If the market is growing quicker than expected, or the employee's performance is better than expected, Carroll feels that companies should be open to doing raises off-cycle.