Our CEO has recently said we should not expect pay increases (above the usual yearly inflation adjustment) unless you're an overachiever or do something really exceptional. Is this counter-productive for staff moral, retention, and productivity or should it be taken as a challenge to do better?
Is this counter-productive for staff moral, retention, and productivity?
Yes, it is.
People generally get better at their jobs with more experience, and if their productivity increases, they expect to be compensated for it. If it becomes clear that won't happen at this job, they'll start looking for some place where it will. The very best employees, if they're getting really good pay increases, may stay, as well as the very worst, who are just lucky they haven't been fired, but a large number of those in the middle will leave.
Are employees becoming more valuable to the company over time? For example, do they tend to develop skills that make them more productive or maintain relationships that bring in business?
If so, it'd make sense to increase their compensation over time to reflect their increasing value. Otherwise, it'd seem like employees would leave to pursue better-paying positions elsewhere, while the company would develop a reputation as a lousy employer.
If not, then it could make sense to not raise their compensation much over inflation. Then if/when employees quit, the company can just hire new employees of the same value at the same rate. The company may want to take steps to avoid too much turnover, but constantly increasing an employee's compensation over their expected market value would be hard to justify.
Also, I'd question the use of raises as rewards for exceptional work.
If an employee's exceptional performance proves that they were more valuable in the past than their compensation reflected, then a bonus could help rectify the misalignment.
If an employee's exceptional performance suggests that they will be more valuable in the future than their scheduled compensation reflects, then a raise could help rectify the misalignment.
If an employee's exceptional performance reflects misalignment in both prior compensation and future compensation, then both a bonus (for the past) and a raise (for the future) could help rectify the misalignment.
In general, I'd be dubious about an employee's planned compensation deviating from their expected value. So, employees ought to receive raises for both their expected increase in value to the company (e.g., due to increased experience) and as adjustments due to them proving to be exceptional performers, while bonuses would seem more appropriate to reward employees for past performance (considered separately from updated projections of their future performance).
unless you're an overachiever or do something really exceptional
This is arbitrary. In reality it means the CEO is unwilling to give raises and is telling everyone not to ask him. He's just putting it in a nice way to avoid confrontation and since he's arbitrarily stating what he wants, he could form fit it into anything. "I put in 20 hours of extra work a week for the last six months to push this product out in time. I want a raise" "Well sorry Jim, but this is expected of you to put over time in and thus, I cannot give a raise."
I'm sure it would cause people to want to quit, but I don't think so unless someone feels like they are putting in a lot of extra work in hope to get a raise. I suspect that this will cause turn overs but not immediately. Assuming the average person is paid within a +/- 10% of the market rate for the area, I suspect the CEO will get about 4-5 years worth of work from that person before they expect to get a raise that will cause them to leave. That's assuming the position is competitive like an IT position where as someone matures in his/her career, they become more valuable. I also suspect that people will find new hires getting paid more than they are as the years go on. In my last job, I was a victim to both of the above: I was underpaid by 25% because I stayed in longer than I should, but at the same time, new hires were hired on at a higher pay that I was getting when I first started and thus, "beat me" in terms of yearly cost of living increases.
Lying is counterproductive
It's reasonable to assume that this is an accurate description of the current situation - that the company fully expects to keep its salary budget per headcount the same (given the inflation adjustment) and the budgets allocated to smaller units and middle management reflect that.
So what we're discussing is actually about the advantages and disadvantages of openly admitting this policy, instead of misleading employees - which is often done. We have many questions on this site about the harmful consequences to "staff moral, retention, and productivity" resulting from management falsely implying that raises would be upcoming, and (intentionally) failing to deliver.
Of course, allocating more resources to staff probably would facilitate morale and productivity - however, if the situation is what it is, I'd argue that lying about the situation would be far more counterproductive than honest, realistic information.
In a lot of countries money loses its value over time due to inflation. For example, Swedish financial politics have a set goal of 2% inflation per year. This means my salary will be worth about 2% less next year unless I get a raise.
So should you expect a raise? I would expect a base raise of 2% per year because otherwise I get a pay decrease meaning the company values me less every year. I would also expect more than that because my increased experience should be valuable in itself. This is given I have the same duties as last year.
Do you have a personal development plan set together with your manager? You should have goals about things to improve every year. If you meet these, you are also more valuable than last year.
Your employer does not see it this way. They already communicated that they believe you are worth less to them every year unless you are "exceptional", whatever that means. Most people are behaving within the constraints set by their managers and don't have much playroom to do anything else.
Personally, I am valuable in the work market at the moment so I would consider this a huge red flag and start looking for other opportunities. Only an exceptional employer is worthy of my time.
If you want to stay and try to be exceptional, make sure you have a meeting with your manager where you write down what you are good at and set goals for the next year. The goals should be specific, measurable and realistic. Meeting the goals should be worthy of a raise.
Yes. It’s counter-productive. And yes, it’s also a challenge. It just depends on the mentality of the listener.
On one end of the spectrum, those who come to work with the mindset of accomplishing the minimum requirement and complain about the smallest thing that comes up will find it upsetting, demoralizing etc... alongside things like the fridge is one degree colder or warmer than it should be, office lighting is too bright/too dark etc.
At the other end are folks that have the mindset of “I want to contribute something” who will read the message as contributions above and beyond what’s expected can get rewarded.
Not only is this policy counterproductive, but it's actually a great way of losing the talent that the CEO is trying to reward!
Imagine a basic entry-level job that pays $100. After a year of 2% inflation, what do you think the same entry level job will pay for someone just starting? Or someone starting ten years later? The salary will go up - but it's not like the company is paying "more" - it's just that the currency they're using is worth a bit less. It's why the entry level salary for a [Insert-Occupation-Here] pays more than it did back in 2000. Or 1990.
So you might start to see the problem. If the entry-level position is going to be paying 2% more next year... and you're going to be giving out a 2% raise for the people already working there - you're effectively still only paying them entry level. Paying people "inflation-only" raises implies they're worth the same amount to the company after working there a few years than when they first started.
But here's where that gets worse. Bob Bobson, the lazy IT computer repair tech? He probably didn't improve all that much the last 5 years he worked there. Sure, he knows a few tips/tricks around the office and a few common ways devices fail, but he's basically adding the same amount of value to the company when he started. Bob, with his inflation-level raises, is still getting paid roughly the amount he's worth. Bob probably won't get much out of switching companies.
But Alice the IT tech? Oh, she works hard. She learns all she can. She's become an expert in google, she's getting really good at troubleshooting new problems, and has become really good at translating "user speak" to "technical speak". Alice's value to the company has skyrocketed. And, more to the point: her value to anyone else that wants to hire her has also skyrocketed. Alice, if she were only getting Inflation-Based raises, would have a huge financial incentive to jump ship.
Charlie, on the other hand, is in between them. He does a decent job. He's much better at his job than when he started - he gets things done faster, more reliably, and with better customer engagement. He's worth more to the company (and to competitors) than when he started out. So he's also got a financial incentive to jump ship (just not as large of one as Alice.)
That's why what the CEO is doing is so stupid. They're trying to incentivize talent... but all they're likely going to accomplish is push out the best talent by giving them a financial incentive to leave. The mediocre employees are going to be the only ones to stay - because they're the only ones worth roughly the same as when they started.
Bonuses or commission are more usual mechanisms for this kind of thing.
i.e. You get your salary for doing your job, and there's an expected level of value you deliver there. Then you get bonuses for specific extra things you do on top to deliver any tangible extra value.
There are issues with motivating such things with salary increases, simply because salaries recur. That makes it difficult to separate the reward you get for specific extra value you deliver, from your job's ongoing market salary. This means that the rewards can be unfair, or raise other issues related to salary in the long term, which is indeed bad for staff morale, retention, and productivity.
Your colleague does something great in year 1, gets a 10% raise, you get no raise. Year 2, you do something even better and get 15%, your colleague gets none. Year 3 you get 5%, your colleague gets 10%. In aggregate over time you're excelling at around the same level, nevertheless your colleague is better off than you just because they were first.
You do something extra that delivers 2X of value, then get a raise of X. You have a salary 10X - so a 10% raise. Your colleague also delivers 2X of value, but their salary is 4X. When they get a raise of X, it's a 25% raise. Is that fair? Ok, so make their raise less. But then you've been rewarded more for the same thing when you already have a higher salary. That's definitely not fair.
Let's say raises aren't particularly common, you have to really excel to get one. A colleague gets one in year 1 while no team mate who is paid similarly does. This colleague never again repeats that exceptional performance. Now they're making X% more, doing the same job as everyone else, without having the ongoing better performance to justify that. That's not at all fair. Worse, what if the policy is later dropped and teammates lose any chance at all of ever catching up?
If you have the kind of relationship with your CEO where you can openly discuss these sorts of things, it might be worth mentioning this, as they might not have thought about it and seen any potential negative consequences.
Bonuses and commission have their own issues, of course, but they (and not salary) are the more standard way of doing this for a reason, and it might be worth thinking about that.
We can talk whatever we want, but it all comes down to supply and demand in that place and time.
If the employees can find, in the same country and city, a better job (more paid, or better in other ways), they can prove the CEO wrong.
If they cannot, if there are no better jobs for the same level of skill and productivity, then the CEO is right.
However, even in the case they cannot find it now, the situation can change. So, it's good for each side to not annoy the other side too much, because if the situation changes, they might all of a sudden find themselves with a big problem on their hands.
If you do things because you can, because the other side for whatever reason cannot stop or punish you, once they can, you will be dealing not only with reaction to the current issue, but also with reaction to all the years of accumulated frustration.
It is not counterproductive IF the same rules also apply to the CEO and the board of directors.
Almost by definition, none of those roles allow them to carry out anything exceptional. If the company makes a successful profit, that is merely them carrying out their job normally. If they are seen to be taking pay rises, dividends, stock options or any other extras whilst holding down pay for everyone else, morale will tank as expected.
A further requirement for it to not be counterproductive is if the same rules also apply to the company owners or shareholders. If the company has had a bad patch, it's normal for there to be some salary stagnation. If the company is making a healthy profit though but refusing to adequately reward their employees, then their employees will leave.
So it is somewhat conditional.
The CEO appears to be assuming that other similar employers in the area are only giving inflational salary increases (on average) and that the salaries for staff in their industry are increasing in line with inflation.
That may be the case (I am not familiar with the specifics of your industry/job market). However, if it is not and salaries in the 'market' are increasing faster than inflation, then it is a bad strategy. Because, in time, the salaries your company is paying its employees will fall behind other similar employers in the local area and many employees will leave to go to places where they will earn more (at least, the best ones will). Sooner or later, the company will also start having more difficulty hiring new employees, because it will not be offering them a competitive salary (unless they pay new staff more than legacy staff, which is inherently unfair and not rewarding loyalty).
Salary increases are not just about rewarding staff, they are also about keeping up with the market value of your employees, so you can retain/attract the best talent. In my opinion, your CEO should be more concerned with keeping salaries in-line with current market value, not necessarily tracking inflation.
Of course, if he wants to attract and retain the best talent, then he may want to consider offering above the currently-perceived market value. (that is where inflation actually comes from, after all ... i.e. competition)
No, from the CEO perspective. And properly run methods of measurments of employee "productivity".
A pay increase, above inflantion, should be a reward for doing more than you are paid for. If you are hired for X amount to do Y stuff then if you do Y+C your pay should also reflect that.
If you do that extra C once then you should get bonus.
If you do it constantly then you should get a raise
OR you company should evaluate your performance and decide if maybe they should hire another employee.
It make sense when your performance is something you (as you and employeer) can check and measure: Key Performance Indicators, Touchdowns, Tasks, Objectives etc.
Then you know what you're supposed to do and see things you can do better. A place for improvement.
If this is wrong for morale? Only for people who would like to get rewarded for doing things they are already paid. So it help company weed out the ones who are not willing to do something extra.
This is fine, as a temporary situation, if and only if the company is in a recession. In such a situation it means "we don't have money for pay raises, but for those who truly deserve one we'll reserve the right to make an exception.".
It's also fine in a low skill industry, when the company expects rehiring and retraining to be fast and cheap, and experience to be valueless.
In situations where people's experience and market value are correlated - and alternative jobs are available - such a policy would be expensive, because it would force all workers to leave the company after a few years in order to get a pay raise.
Flipped around from the other perspective this would be like you telling the CEO, "don't expect productivity increases unless you pay something really exceptional". Expressed that way is damaging to the relationship also, but makes it more apparent why...
In general, one should steer clear of taking a hard line on the terms of the relationship, unless there is a willingness to increase the risk of the other party walking. I think in this situation, the CEO has upped the risk of their employees starting to look elsewhere.
The word "overachiever" can have different interpretations here, and the answer can be different because of that. I discovered this in a chat with JBentley (thanks!).
To illustrate let's suppose that two people, Alice and Bob, are both fixing cars. The company expects new hires to both fix ten cars a day. As they gain experience, in one year's time, the company expects them to be able to work faster and so fix eleven cars a day. Alice has worked for a year while Bob is a new hire, so Alice is faster than Bob.
In the first interpretation of "overachiever", Alice is overachieving - she fixes more cars than Bob and is therefore worth more. In the second interpretation, Alice is not overachieving - she's simply achieving what is average.
I'll venture that under the first interpretation, your CEO is being quite logical. Experience is not worth much if it doesn't lead to an improvement in productivity. Under the second interpretation however, your CEO is not being fair, because Alice is obviously worth more than Bob to the company (she's fixing one extra car a day).
Ultimately what you and I think is the correct interpretation doesn't matter; what matters is what your CEO meant. It's not something I would be comfortable asking about. If you can draw conclusions based on indirect observations, I would suggest doing that first.