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.