What does peanut butter have to do with pay increases?? The peanut butter approach for pay increases gives the same pay increase to all employees regardless of their performance level. For example, if you have a 4% salary increase budget then everyone gets 4% across the board or very close to that. Having this approach is like a cost of living adjustment (COLA). This is not a recommended approach for the purposes of building a positive company culture and increasing employee retention, especially for your top performing employees.
If your company has this type of salary increase philosophy, we would highly recommend moving towards a "pay for performance" compensation way of thinking. A "pay for performance" compensation mindset with a 4% budget for salary increases would have top-performing employees receiving a 6-8% increase and bottom-performing employees getting a 0% increase.
Why would you do this? Remember that the top (10-15%) of your talent pool really drives the overall performance of your company. You need to do everything to retain your top talent. If your bottom-performing employees (your C players) leave the company - that's a good thing, isn't it? You can hire better people and upgrade your talent pool. This strategy is called "Top Grading" and is the method used by best-performing companies.
Keep in mind, a key objective is to manage your talent pool effectively and ALWAYS work toward increasing performance. Employees are the biggest item on your balance sheet. The better talent you have, the better overall financial performance you will have. It's that simple and that difficult at the same time!
The "peanut butter" approach for pay increases and bonuses holds a company back from future growth and productivity. Moving to a "pay for performance" philosophy will set up your company for increased performance in the coming year. You can do this right now starting with your upcoming base pay increase and bonus discussions going into 2023! The world's best companies already do this, you should too!
We discussed different pay increases and compensation strategies on our recent webinar entitled "Fix Your Compensation Challenges" which is now available in podcast and video form. For more detailed information on compensation strategy, you can listen to or watch the compensation webinar by clicking the links below.
