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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?

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    Is this an exceptional company with exceptional people and an exceptional CEO? Then, perhaps, it will help productivity. But if a normal person is told that they are going to play the exceptionality lottery with exceptionally low winning odds, why should they try? – Captain Emacs Nov 18 at 0:32
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    Be careful: In some countries, inflation measures do not include rent, and therefore severely underestimate the actual increase of regular expenses households are making. So even if they increase it "only by inflation", depending on how inflation is measured, you may still lose real income. – gerrit Nov 18 at 8:29
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    Did you CEO promise exceptional raises for exceptional work? Or just normal ones? Or was it not mentioned. I mean, are you collectively going on an all or nothing viking raid to cover yourself in riches, or are you just going to bust your asses for megre returns. How was this sold? – Nathan Cooper Nov 18 at 8:46
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    One wonders if this cap on increases in total compensation also applies to senior management. Perhaps you could ask how much senior executive total compensation -- not salary; salary is peanuts to executives -- increases year over year, and what "exceptional" behaviours justifies it. – Eric Lippert Nov 18 at 18:30
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    @davnicwil it certainly is an interesting question on management, economics, strategy etc in the workplace. Specifically, it's an interesting question seeking opinions about these workplace issues. It doesn't have a problem it seeks to solve and primarily opinion-based questions are off-topic here. – Will Nov 19 at 9:25

15 Answers 15

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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.

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    Comments are not for extended discussion; this conversation has been moved to chat. – Mister Positive Nov 18 at 16:43
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    if they're getting really good pay increases. It really depends on whether this is an up-or-out thin-out-the-heard thing or whether you have a begger-ceo who wants to pay normally for the exceptionally and pay badly for the normal. We can't know. – Nathan Cooper Nov 18 at 23:13
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    Dilbert's boss gave out new titles, not raises, for exceptional work. "It's how we recognize our best employees". Dilbert: "I thought out best employees left for other companies." The Boss: "That's the other way to recognize them." – Shawn V. Wilson Nov 19 at 7:35
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    It's not just that they leave, it's also that they have no incentive to increase their productivity while they are still there. – Jon Bentley Nov 19 at 14:27
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    @Allure getting more productive as you gain experience is not the same thing as being an overachiever, an overachiever is someone who goes above and beyond what's expected of them to deliver exceptional results. – Eloff Nov 20 at 13:06
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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).

  • A classic example is food chain cashiers. Since you the business can get new ones for minimum wage and their learning curve is short they will be paid minimum wage. – user3819867 Nov 18 at 10:56
  • @Nat The company develops and supports retail software so yes overtime employees do become more valuable as they acquire specific knowledge and skills to cater to the industry. A new hire could take a few weeks before becoming productive depending on their skill level. A bonus scheme has been implemented though it is fairly convoluted in terms of the formulas used to calculate bonuses and employees are only entitled to it after a certain time at the company. – KDev Nov 18 at 22:59
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    Exceptional work deserves exceptional pay (i.e. a bonus). A consistent pattern of better work deserves a consistent pattern of better pay (i.e. a raise). – Stop Harming Monica Nov 19 at 15:55
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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.

  • The cynic in me says this is the right answer. – FreeMan Nov 20 at 20:57
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    If it's not something competitive like IT then I'd expect it to be 4-5 years - otherwise I'd expect someone to leave within 2 years due to policy like this, and possibly as soon as 1 year if they perceive that the policy is likely to affect their future earnings. – Logan Pickup Nov 21 at 2:05
  • @LoganPickup You're right as most lateral positions will ask for salary information. If you currently make 30% under, you're unlikely to get matched to what you want. I also suspect as people realize new hires are getting paid more than they did when they started, they'll quit in anger unless there is a larger gap or pay raise between their current amount. – Dan Nov 21 at 13:58
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    I'd expect the CEO to not care, either. At the job I described, they regularly joke about people leaving. They call it a changing times and they just expect that people will leave and they'll continue to hire folks. They are getting better at employee retention but overall people quit in large numbers as they realize their careers are stale and they become uncompetitive in the marketplace. – Dan Nov 21 at 15:14
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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.

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    This is a good point. If there is in fact no money for raises above inflation, it may be better for the CEO to be honest about it. Doesn't mean people won't leave though. – DJClayworth Nov 18 at 20:33
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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.

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    No, the company loses 2% unless they raise their prices to match the inflation. The raise is not a loss of real income, it's preserving the real value. – Emil Vikström Nov 18 at 6:35
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    The OP clearly states "we should not expect pay increases (above the usual yearly inflation adjustment)". – Mawg says reinstate Monica Nov 18 at 7:07
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    @jwenting: You seem to have a entirely distorted view of inflation. Inflation affects all prices: parts bought, wages paid, and goods sold. If things are right, the price of goods sold exceeds the price of parts&labor, so there's a profit left. If all prices rise by 2%, profit rises by 2% as well. – MSalters Nov 18 at 8:20
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    I don't know about Sweden, but in the UK, the commonly used Retail Price Index (RPI) inflation measure explicitly does not consider rent, which makes it pretty useless when the expense that may well compromise 50% or more of household income in a city like London increases by 5% per year. So when they "adjust by inflation", read the smallprint. – gerrit Nov 18 at 8:27
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    How can tax increases be "left out of the official documents?" If taxes are increased, surely that's reflected in both government documents, which would show an increase in the tax rate, and corporate financial statements, which would show an increase in the effective tax rate paid by the firm? – Zach Lipton Nov 18 at 9:17
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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.

  • I agree with you wholeheartedly. I would never expect a pay rise unless I'm going above and beyond the call of duty. To me a pay rise is earned and shouldn't be expected for merely turning up and doing the bare minimum. – ChrisFNZ Nov 18 at 2:30
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    If the idea of the CEO here also includes exceptional raises for exceptional people, then this is a good answer. If the CEO mostly wanted to communicate that there are not going to be any raises, the advise is bad. This requires more info from OP to judge. – quarague Nov 18 at 9:27
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    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... - It's also demoralizing and upsetting if you don't complain about the small things -> you're spending your valuable time and brainpower learning the companies' processes, business, colleagues, quirks, market, competition, customers, etc., next to what you were hired to do: the job. You should expect a payrise for being more knowledgeable, and by proxy more efficient, as time goes by. – rkeet Nov 18 at 10:27
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    I come to work wanting to contribute. But I realize that I am unlikely to contribute something 'exceptional" because all my colleagues feel the same (that's what I like about it). So it still comes down to "only a few of us are going to get pay raises". – DJClayworth Nov 18 at 16:45
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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.

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    Alice might get a raise for her exceptional work, but Bob and Charlie have no incentive to improve because they won't be rewarded. Eventually the company ends up with Bob running a department of newbies, who don't stay long. – Robin Bennett Nov 19 at 16:06
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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.

One example

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.

Another

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.

Another

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.

  • "Bonuses or commission are more usual mechanisms for this kind of thing." I don't know about jobs with commissions, but the several places my wife and I have worked with bonuses have always given said bonuses in conjunction with appropriately large raises (i.e. higher than inflation). – Kevin Nov 19 at 17:58
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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.

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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.

  • A further requirement for it to not be counterproductive is if the same rules also apply to the company owners or shareholders huh? Owners and shareholders - by definition - are "paid" the profits the company makes, not a salary that is subject to discretionary or arbitrary raise policies. – dwizum Nov 18 at 21:27
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    @dwizum Nope, they're paid a dividend which is not necessarily related to profits. But even insofar as it is somewhat linked to profits, that profit is money which could have given someone a pay rise. The CEO has made this a zero-sum game, in other words, and it's not in the employees' interest to work harder to make the company more successful when the only benefits go to the owners or shareholders. – Graham Nov 18 at 23:16
  • If the employees want direct access to profit, perhaps they should consider becoming investors. Otherwise, why should they expect anything different than a salary? Profit is tied to risk (the risk of investing and potentially failing), not work product. Work product is compensated by salary. Claiming that owners and workers need to be paid based on the same model doesn't make any sense to me. – dwizum Nov 19 at 15:07
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    @dwizum The point is that over time employees do become more valuable to the company and so do deserve a greater-than-inflation pay rise as a matter of course. The only way this can be justifiable is if the company is in a financial situation where they can't afford it. If the owners are extracting plenty of profits, then they and the CEO are directly and explicitly abusing the trust of their employees. Remember that the OP asked for how this could be acceptable. If the owners are still taking large profits whilst squeezing salaries, then that fails the OP's test. – Graham Nov 19 at 16:21
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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)

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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.

  • You say "no" and then argue "yes". A properly run method of measurement measures all improvements (I agree with that), not just exceptional increases (which the CEO wants to measure) – MSalters Nov 18 at 10:23
  • @MSalters I mean "No" as in "from a CEO POV it's not counter producitve". I also argue that it make sense only if you measure all improvements because only then you can get information about exceptional ones. – SZCZERZO KŁY Nov 18 at 10:33
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    Most people become worth more after they have a year's extra experience doing something. They don't have to be "exceptional". – DJClayworth Nov 18 at 20:32
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    @DJClayworth Most people are hired based on tasks they should do not their worth. You learn how to do something faster/better? That's the exceptional work. YOu do something the same? Where's the increase in worth? – SZCZERZO KŁY Nov 19 at 8:03
  • By "worth" I mean "value to the company". And learning to do something faster or better is not "exceptional". Most people do it in the course of a year. That's the problem. Most people will be improving their value to the company, but only a few will be getting pay raises for doing it. – DJClayworth Nov 19 at 14:20
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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.

  • The health of the company doesn't matter, as employees can always leave for a healthier company. It only makes sense in a national/global recession when they can't. (or a low-skill industry, as you say). Unless perhaps the CEO promises double raises the following year. – Robin Bennett Nov 19 at 16:25
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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.

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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.

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