Are the days of the annual merit salary increase numbered?

It is that time of year when performance appraisals are in the works and employees start to wonder about their annual salary increase. Will it be 5% or 3% or will it be zero? No one wants to think about the latter but there are a few reasons why some employees may be disappointed this year. Let’s look at some of the major dynamics that may come into play and what some of the new trends are.

First, the economy around the world is operating largely in a slow growth environment. Even some of the most rapid growth economies like China are growing at a much slower pace than in previous years. Companies are struggling to meet shareholder expectations, relying solely on revenue growth. This leaves cost reduction as the primary lever to meet earnings forecasts. In other words, less money for salary increases.

Slowing economic growth is one factor but more importantly, many organizations are abandoning the annual salary increase process. This is a significant cultural shift as many employees and organizations expect annual salary increases as it has been part of an ingrained performance review process. HR leaders and business leaders are struggling to see how this is providing the motivation and enthusiasm that it once did and often view the traditional performance review as an unproductive process that can instill fear and disappointment with staff. Industry leaders such as GE, Deloitte and Adobe have abandoned annual salary increases and are drastically changing the annual performance review process, including the ways employees are recognized and rewarded.

These trends around annual merit increases and the annual performance review begs the question as to what companies should do in place of these long-standing processes. The goal is to create more highly motivated and engaged employees. One of the newer strategies being used includes a shift to coaching and non-traditional rewards systems, with the goal of creating a more responsive and engaged employee.

Coaching programs for managers and senior leaders have become a popular option for companies to invest in. Employees desire feedback on a more frequent and timely basis. Historically, the annual review process provides most performance feedback for an employee. This leads to some of employee’s anxiety and lack of motivation. With coaching, managers behave in a much different way and employees know where they stand and where to focus their development efforts.

Another major shift is the changing focus on reward structures. Different employees value different rewards. Depending on their stage of life and personal goals some employees might value time off while others might value training. Employers need more tailoring and flexibility of reward programs to meet the individual needs of their employees, resulting in higher motivation and engagement. Companies are starting to embrace this theme with the implementation of programs like:

  • Parental Leave
  • Flex time in place of pure financial rewards
  • Cafeteria style health plans
  • Investment in employee selected training programs
  • Providing local work with limited travel
  • Increase in incentive compensation
  • Advanced recognition programs for employees

Clearly the world for employee retention, motivation and engagement is changing fast. Employers need to focus on understanding what employees value and creating a culture where employees feel like they are being heard. To achieve these aspirations nothing will replace having great managers who are well connected and respecting by their staff.

Ruby Maini

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