Employers still giving raises, mostly to high performers

U.S. employers will hand out pay raises averaging 2.5% across all employee categories in 2010, according to the annual WorldatWork 2010-2011 Salary Budget Survey.

But in most cases, the size of the raise will depend on how well employees have performed. Low performers can expect to see minimal increases of up to 0.7%—or even nothing at all. Middle of the pack performers might expect a nominal base pay raise of 2.4%.

But high performers will see more—an average raise of 3.7%. That’s 54% higher than a midrange performer. Surveyed employers reported that roughly 24% of employees are rated as high performers, while most are classified as middle performers.

“With underfunded salary budgets this year, employers want the most bang for their buck,” says Anne C. Ruddy, CCP, president of WorldatWork. “They are no longer averse to withholding merit increases for poor performers so they can afford to grant meaningful increases to better performers.”

WorldatWork’s annual survey is the largest salary study in the United States. This year, the nonprofit organization polled 2,497 employers representing 15.5 million U.S. workers.

Book of Company Policies D

The survey found that one in three companies has a separate budget for handing out more pay to employees who have been promoted. Promotions were typically worth an additional 7% to 8% over employees’ previous pay rates.

In addition, a top performer can expect to benefit from an employer’s variable pay program. “Companies expect performance and are willing to reward employees based on organization success, individual performance or both,” says Alison Avalos, research manager for WorldatWork. “Pay for performance is alive and well.”

For 2010, employers are budgeting an average of 5% to 12% for variable pay, depending on employee category, such as exempt, nonexempt and corporate officer status.

Top cities for top performers

Metro area is another variable influencing the size of salary increases for top performers. While employers reported an average pay increase of 3.7% for exceptional performers, employers in some metro areas reported above-average base pay increases for the cream of the crop:

  • 4.1%—San Jose, Calif.
  • 4.0%—Boston, Detroit, Houston, Portland (Ore.) and Seattle
  • 3.9%—Atlanta, San Diego, Tampa and Washington, D.C.

5 steps for starting a pay-for-performance system

Most organizations believe they do pay for performance. They don’t. If they did, a few people would get lots of bonuses and high raises, while others would get nothing extra.

Does that sound like your organization? Didn’t think so.

If you’re committed to starting a true pay-for-performance system, you’ll want to ease into it with lots of crystal-clear communication. Here are five ways to get started:

1. Tell employees how much of a raise they will get if their work is distinguished, excellent or simply proficient.

2. Establish accurate performance appraisal systems, and train supervisors in appraisal and feedback skills.

3. Know what your employees want. Money is the most appreciated reward, but time off and public thank-yous are a close second. Older workers appreciate different rewards than young colleagues.

4. Budget for the change. Setting an average raise isn’t enough. You need separate pots of money to cover merit increases, adjustments in case of market changes, incentives and appreciation.

5. Communicate your new plan so everyone knows what to expect—and what to do to earn the most money.