Updated: Jan 24, 2022
I’ve been doing a lot of work recently on the topic of performance reviews and a question that keeps coming up is this: is it a given that a positive performance review will result in a remuneration increase?
The short answer is no. Blunt but accurate.
The long answer is that while there is a solid relationship between performance and remuneration, salary increases are not guaranteed. Like it or not, remuneration always links to four factors:
I was researching the topic of remuneration reviews and came across an article written by Egan Associates. While Egan Associates blogs audience is Board Members and two of its three its keywords were executive remuneration and board remuneration, the overall context and details Egan Associates wrote about can be extrapolated when considering remuneration reviews for most SME’s (small and medium-sized enterprise).
It would be fantastic for all of us if there was a bottomless bucket of cash available to a business when anyone wants a pay increase.... but life’s not like that.
Remuneration reviews are a lot like peeling an onion. It is only once the outer layers have successfully been studied that the central matter at hand can be assessed. In this case the onions layers represent the economy, sectors and geography, company and individual.
Business owners have to consider these four factors when assessing remuneration increases. If they don’t, they are not being financially responsible to themselves or their employees. No one wants to go out of business because they made financial decisions that supported the short term need of an individual in the good times, as opposed to the long term organisational need to ensure there is enough money in the bank to ride out the bad times.
I have and will always argue that looking after your key talent – people who, because of their skills, knowledge and abilities are considered integral to the success of an organisation – is multifaceted and involves more than just throwing money at a person annually. Salary increases pay an important part in the retention of key talent, but they must be balanced against the weight of job satisfaction, opportunity for growth and development and a supportive and enjoyable work environment.
I’m not saying that every SME should sit down and research every factor identified below. I am saying that business owners have to be aware of which of the economic, sector and geographic factors have applied to their business in the last financial year and consider those impacts against the company’s strategic financial goals vs actual financial performance, before finally being ready to look at what their total budget for remuneration increases actually is. Only then can an organisation accurately consider the individual’s performance and weigh it against the performance of others when considering how far the total salary increase budget will stretch and who will reap the rewards this financial year.
Four Factors When Considering Remuneration Reviews
Is the Australian economy achieving above or below trend growth?
What about international economies if you work in international markets?
Is productivity (labour) increasing or decreasing?
How fast are average wages increasing?
What is happening to the consumer price index?
Is unemployment on the rise or decline?
Is there a high level of job vacancies?
What is the current cash rate set by the Reserve Bank of Australia?
How strong is consumer confidence?
What is investment sentiment like?
Is performance the same in the public and private sector? Egan Associates
Sector & Geographies
Is the sector/region growing, stagnant or contracting?
Are wages increasing faster than the average or more slowly?
Is there a skills shortage or a broad choice of suitably qualified employees?
Is productivity on the rise or decline?
How does performance compare to other sectors/regions?
Do factors such as the current cash rate level or exchange rate affect the sector/region in a positive or negative fashion?
Is the current legislative environment favourable?
Is it changing? If so, will it become worse or better?
Is the sector dependent on factors such as commodity prices, seasonal/climatic variability or property cycles? Egan Associates
All of these factors, among others, will have bearing on the ability of organisations to increase remuneration levels.
Just as some sectors will lag the general economy while others outperform, each sector will have its stars, battlers and up-and-comers. This is the point when benchmarking and performance against company-wide performance targets can be considered. It is also important to use resources such as recruitment company or industry associations annual Salary Survey’s to review comparative company/competitor remuneration and assess if you are paying your employees at the top, middle or bottom salary range.
How does performance and remuneration compare with comparable companies? Has the organisation’s budget been met?
Have stretch targets been met?
What about milestones and strategic targets? Is the company tracking to meet long term goals?
How is the company performing against analyst expectations?
Are there other implicit requirements not detailed in incentive plans that have not been met? For example, does the company’s culture match the desired ideal and if not, are remedial measures prepared or in process to change this? Or has the company’s brand been damaged in the past year following issues in the business? Egan Associates
Even when a company is performing well, it is important to distinguish between top performers and “phone it in” individuals.
Has the individual met their personal targets?
How has their business group/division performed?
What did they do to contribute to overall group performance?
Have they been proactively innovative?
Have they positively contributed to the desired company culture?
What is the likelihood of the individual being promoted internally or poached by another organisation?
What sort of “skin in the game” does the individual have?
Were there specific reasons the individual was brought into the role that will have bearing on the path their remuneration takes? Were there particular understandings when the individual began in the role about progression with proven performance? Egan Associates
Only by considering information within the context presented above can organisations correctly assess whether to increase remuneration and by how much.
If I had a dollar for each time an underperforming or ‘phone it in’ employee sauntered into a remuneration review expecting a 10% pay rise, I’d be a rich woman. Business owners needs to empower their managers to set accurate salary expectations and be more honest about the performance of the people who report to them. This honesty about performance will help managers gently but firmly rebuff pay increase requests where they are simply not warranted.
Positive performance does not guarantee a pay rise, and mediocre performance should not be finically rewarded. It is important for business owners to make their philosophy and position on remuneration known within the organisation. The easiest way to do this is to have a remuneration policy, but it’s not the total story.
A remuneration policy is simply a tool and should be used on collaboration with another important tool – performance management and reviews.