Theory of Raises

[dsrtao]

[this has absolutely nothing to do with the company I work for, except that it started me thinking about raises]

The components of a raise are:

• performance evaluation: has your value to the company increased?
  
• economic adjustment: the dollar is worth less than it was last time around
  
• market adjustment: would it be rational for you to accept the transition costs involved in finding a new job? Would it be rational for your employer to replace you?
  

All of these are essentially historical. Forward-looking compensation should essentially be in two categories:

• Job change adjustment: you're going to be doing something new, the pay should be renegotiated.
  
• Incentive reward: in exchange for reaching certain (clearly defined!) goals, money is promised for the future.
  

Have I missed anything?

Comments

Golden handcuffs

[sml.livejournal.com]

You cover it a little bit in market adjustment, but raises are often used as an incentive to make sure the person doesn't feel they can get better pay elsewhere. Forward thinking, that piece is critical part of compensation.

There are some companies that base their whole compensation strategy on that one point. A huge investment is made in finding, training, and socializing people. A loss of a key team member is difficult to replace.

(I don't deal with compensation or compensation strategies at my current employment, so I am speculating here)

Re: Golden handcuffs

[dsrtao]

Sure. When I worked for the great technical company that was bought by a telco that was bought by another telco, the argument my group made was that replacing any one of us was a) hard b) took a long time c) cost the company about a million dollars in lost sales during the transition.

Management largely agreed with this line of thinking, up until the second purchase. At that point it became clear that we were going to be eaten and the chewed-over carcass spun off.

[goldsquare.livejournal.com]

Depending upon your purpose, there are also types of reward: raise, bonus, incentive, non-monetary compensation, and so forth.

[dsrtao]

I'm largely thinking about raises right now. What's the difference between a bonus and an incentive? They appear to be two names for the same sort of thing: a promise of money in the future directly linked to the fulfillment of particular goals.

[goldsquare.livejournal.com]

Bonus is backwards looking ("Good job this year: have a check") and an incentive is forward looking ("If you can do all 3 impossible things, you can have a check").

Also consider profit-sharing in the mix, for whatever that might be worth.

[jtdiii.livejournal.com]

You are also presuming a company wants to remain at the top of the salary band.

In fact many companies will hire near the top and then award raises at below average rates in the proven belief that once someone is settled in they will not look at the prevailing rates, or be willing to leave unless there is a major discrepancy.

[dsrtao]

That's probably a great way to ensure that you have employees who are happy for about three years, then leave.

[metahacker.livejournal.com]

The vast majority of people I know are unhappy at their job. This points to a widespread rash of this.

From a capitalist perspective, salaries are generally set at "the lowest number we can give you that won't cause you to leave". This is well below "the lowest number at which you will join the company"...

[jtdiii.livejournal.com]

Check out the average defense contractor... more like 15-20.

[autopope.livejournal.com]

You're looking at it from the employees point of view.

That's not the right outlook. You need to think yourself into management's shoes.

* Is the employees' contribution to the bottom line such that they're not trivially replaceable and their loss would impair your division's operation? (This may also depend on external hiring conditions ...)

* Are you being squeezed for efficiency improvements from up top?

* Would the money available for handing out rewards be better spent on hiring extra hands, or transferring to the "profit" column of the balance sheet?

* Do you care about employee morale?

[dsrtao]

All fair points.

[its-just-me.livejournal.com]

I have with my 2.0 annual raise for the past six years been gaining a drastic pay cut.