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Friday, May 02, 2008

A Lousy Raise

I just spoke with our Finance Director, who indicates that, due to our company's subpar performance (of note: we conducted a 10% company-wide RIF in July '07), our typical 4-5% annual increases will either be
(a) zilch;
(b) 1.5 - 2.5%; or
(c) option "b" plus the possibility of 1-2% more based on company performance when September '08 rolls around.

To complicate matters, our pay increase formula typically includes comparison with market data (some are at market, some are below) and scores from performance appraisals. Any of the options presented by the FD throw our formula out the window, thereby ticking off employees who have (a) spent a significant amount of time on self-appraisals, multi-rater appraisals, appraisals with managers, etc. (I can hear it now -- "what's the point of appraisals?!"); and (b) know they are below market rate.

I have highly recommended that, if at all financially possible, we go with any option that is not "zero,", knowing that, regardless, our staff of approximately 40 individuals will be upset and further demoralized by the news because they have been working hard throughout the last six months to get our numbers up.

My question to you is this: In our small, close-knit environment, how do we best manage employee expectations for increases given the reality of the situation? *I* know that no raises or minimal raises are reasonable given our company's financial situation (I'd rather have a job than give everyone the raises they "deserve"), but we've had some other major internal morale issues lately (top managers started a shadow organization and left last fiscal year to compete against us -- it's ugly), and I can see this situation inciting employees to either (a) stay and quit, or (b) leave and cause all the issues that turnover in a small company creates. Another note: we are in a niche market that's difficult to recruit for. Additionally, we have approx. 65-70% of staff who have been with the company 5+ years.

Thank you, Evil HR Lady! I appreciate your kind consideration and assistance!

I feel your pain. You've lost a bunch of managers, you've laid off 10% of your workforce, and now you have to tell the remaining group that their raises will stink. Fun!

Your company is small--40 people. They should ALL be aware of the situation already. In fact, with a company that small, every one of them should be able to have a direct effect on the financial success of the company.

What is going on to improve the financial success of the company? Have the Finance Director, CEO, and head of HR (I'm guessing that's you) met with everyone and taken their suggestions?

I guess I see this more as a business failure than as a need to spin things to make employees feel like they are getting a good raise when they are not. There may be a fundamental disconnect with understanding where the money comes from in a business. "I've worked hard, I deserve a raise." But, your work has not been successful for the company.

Yes, that will go over great.

What I would do is publicly tie compensation to performance--with the understanding that with increased COMPANY performance people could do much, much, better than the 4-5% they've received in years past. Long term incentives, such as stock, can really help the company in this situation.

Because the company is so small, and people should be able to see the results of their work, I would recommend stock options or another profit sharing plan, in conjunction with performance evaluations and whatever raises the company can afford.

The CEO may freak out (it's MY company and that cuts into MY profits), but there won't be any profits if the workforce is disgruntled or gone to a competitor. Keep in mind, as well, that it's more expensive to recruit new hires than it is to keep the current ones happy. If you can't afford a 4% raise now, how are you going to afford to recruit, hire (at market rate) and train new employees?

This is not to say you need to give the higher raise, just that without giving employees a reason to work for the company's long term success, you'll be in that boat.

I don't envy your situation. But, it's reality. And the good news is, if your people are paying attention to the news, they'll think that the economy is just about to crash into a recession, the likes of which have not been seen since the great depression. So, give them some gruel in the company cafeteria and tell them to like it! (Just kidding.)

As usual, I am betting my brilliant readers will have other suggestions to make your life happier.


Amit Avasthi said...

This is the first time I read your blog and I must say your observations are fantastic. However as per me there is another problem with small orgn. How can they afford to set up a HR orgn which can cater to managing employee engagement on one hand and taking care of day to day HR activities on the other. Do they have the scale to invest so much on HR ? Do they outsource, if yes how does CEO see value ? These are some questions which are tough..not sure if you have answers.

Anonymous said...

My advice would be to make sure the company is sending consistent messages. What do I mean by that? Well, try telling staff that the salary increase budget this year is in the region of 1.5% of payroll, and you are going to prioritise this to individuals who are either well under the market, and to individuals who have received outstanding performance appraisals (this means you are remaining true to your formula and preserve at least some integrity in the performance appraisal system), Oh, and by the way, management will be forgoing any increases this year in order to leave more in the pot for those who make it happen. You have all read the news, and you know it's going to be a tough year, so let's do our best with what we have. Perhaps keep a little over for a hardship fund - a small organisation of 40 people can feel a bit like a large family, and now may be the time for the family to pull together.

No, it won't be popular (especially not with the managers), but at least you retain your professional integrity and some hope of keeping people. The alternative is to complain about low budgets, cutting back and tightening our belts, only to see CEO/owner/senior manager driving around in a new car or going on an expensive holiday. That is not a consistent message.

I can - and have - lived with little or no increase in lean years, but we all got through it. Good luck.

Anonymous said...

Like she said:

If you want folks to absorb your losses in the slow times, you have to share your profits in the good times.

Otherwise you're simply going to look greedy, and everyone will quit.

If a manager says "hey, i don't want to share future (high) profits; that's not your benefit!" then as an employee I would ask "why, then are your current (low) profits my problem?"

Dataceptionist said...

Being on the receiving end of this type of raise, personally for me the stock/share thing only works if you're in the for the long haul. If your employees are already demoralised and considering leaving, offering them stock instead of money will be the nail in the coffin IMHO.
Not an enviable position, best of luck.

Anonymous said...

I agree with the statement that one should share profits during the good times. I've worked for many corporations where there have been no to minimal raises during the lean years, and standard raises during the most profitable years. During some of the most profitable years, we received bonuses (that were tied to company performance). So, you might consider implementing a bonus program and just keeping standard raise amounts most of the time.

Tanya said...

This may be a little late, but we were offered bonus vacation days and extra non-financial perks (more flexible schedule, etc) when my organization didn't have money to give us even cost of living increases... and all of us stayed, and were appreciative that they were making an effort. I'm pretty sure productivity increased, too, with such good motivators.