How do I give an increase to an employee who has reached the maximum of his salary range ?

How do i give an increase to an employee who has reached the maximum of his salary range?

How do I give an annual salary increase to an employee who has reached a maximum salary ceiling in his or her notch or position ?

A question from James at HR Toolbox… but one which I have also heard from clients and past colleagues as well.

It can happen quite easily that someone reaches the maximum pay for their grade or job.

Please, never promote someone “because their pay is too high and doesn’t fit into the salary range” !

I’ve seen it done at some of my clients and it creates all sorts of problems which are worse than having to manage someone who is an exception, or borderline an exception. Maybe I’ll cover that in another post someday….

A recommended approach here would be to calculate the amount of the annual increase the employee would get if there was no ceiling, and to pay it as a lump sum instead.

For example : 

  • Base pay : USD 50,000
  • Salary increase for that employee’s performance : 3%
  • Instead of increasing the base pay to 50,000*1,03 = USD 51,500, pay 50,000*0.03 = USD 1,500 as a lump sum.
  • Keep the base pay at USD 50,000.

Advantages : 

  • The employee is still rewarded according to his performance
  • Sends a positive message to the employee (good for perception of fairness). You may also want to remind the employee that in fact they are lucky as they are already paid at the top of the range for their job, which means “more than the huge majority of your colleagues in the same job” 🙂
  • This doesn’t have to be permanent : as the salary range is upgraded and the employee “falls back” within the range they will become eligible for the regular salary increase again. The same applies if the employee is promoted to a new job (a true promotion, of course… see my initial comment)
  • No increase in permanent costs
  • The employee doesn’t drift too far from what the company deems appropriate for that job (this why there is a ceiling in pay) and reduces the risk of being singled-out in terms of costs, which could be a negative if the company faces financial hardship.

I hope you find this quick tip useful for your upcoming salary review cycle !

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Comments

  1. Hi.

    Hope you are in high spirits.

    One option could be to divide the lump sum amount into 12 months and make it pay with monthly salary (just like you pay for phone, transport allowance) but off-course no bills will be submitted. This will help the morale going every month, no productivity losses till the year completion. However, I have come across one organisation who actually didn’t give ANY salary increase for the people whose salary had jumped out of their grading structure. Hence, no annual increment as the employee salary has reached the ‘sacred’ grading matrix. Any suggestions ?

    • Hi Samir,

      I understand why a company may not want to increase the salary of an employee who is paid more than what their grading structure allows.

      If the employee is a great performer, the approach I give in this article, helps to recognise their efforts and performance, but does not increase the permanent costs of the company, and leaves the employee in the same place, salary-wise, than they were before the salary review exercise.

      Paying the lump sum amount on a monthly basis is an option, however I’d say it will only have a motivational effect if the amount is large enough to be perceived. For example, 3% increase on someone with an annual basic of AED 120,000 (monthly basic AED 10,000) is AED 3,600 or AED 300 per month.

      There is no right or wrong here, and each company will make its own decisions. Here are a few things to consider when trying to decide if you should pay a lump sum or pay the amount on a monthly basis : do you think the employee will be happier/more motivated/feeling recognised with AED 300 each month, or AED 3,600 at once ? Will the motivation effect wear off, or do you anticipate the extra 300 will provide a surge of motivation consistently through the year ? And, from a company standpoint : is it worth the extra administrative work to add it to payroll calculations each month ? If the employee leaves during the year, the “loss” of that amount should be very tolerable for the company so there’s not really a financial risk here.

  2. Sandrine you are right that if the job is a grade X the job holder should remain a grade X employee.

    However I have a couple of other comments. To my mind the grade boundaries are artificial limitations to help manage a dynamic system. The employee in question should have been picked up once they had passed the mid point of the grade and considered if they were fit to take on another job, with training etc. which may be at a higher grade. If not then you have the decision as to whether their performance warrants an increase, or indeed whether they are covered by an agreement which automatically increases by years of service.

    I agree that the lump sum is an option but this may have other negative implications on any pay related benefits such as employer pension contributions.

    If this really is a one off then red circle it and try and ensure no one else joins that elite outside the box. I have noticed over the past few years that some companies have introduced salary scales with a min and target mid but with no max. Though this tends to be for senior staff.

    • Hi John,

      I see your point, and I agree that employee who are paid in the third quartile of their salary range should come under scrutiny to see what’s the origin of that pay position. And definitely, if they have the potential and willingness, and there is an opportunity, they may eventually move up the ladder.

      But, sometimes people reach their maximum potential, or they don’t want to be promoted (might want to remain an expert, not a people manager – might not be able to accommodate more responsibilities and working hours with their family priorities, etc). Yet, they are still performing at expected level, or even above.

      In that case, the salary does go up. While they’re in the salary range, they’re in what’s deemed appropriate by the company. And then at some point they may reach the maximum.

      Companies need to have an approach to manage such cases. They are, and should remain, exceptions. But all of them should be handled consistently so that there’s no imbalance of equity within the organisation.

  3. Akash Deep Thakkar says:

    Hi Sandrine,
    Hope you are doing well!.
    If we look for the Pricinple of Meritocracy the first preference is given to the performance. if an employee is top performer and he is at the max of his/her band, Giving a lump sum hike in that case will not be a motivational factor.
    Also, giving a minimum hike again creates a difference in comp of his average performer. For ex- if a high performer is getting a remuneration of 10lac which is max at his/her band. his minimal increase is high as compared to the average performer who are at the median or below the median

    • Hi Akash,

      For sure a “small” increase for someone paid at the maximum of their range may be higher than an “average” increase for someone at the minimum of the same salary range – depending on the spread of your salary range, and the % of “small” and “average” increase (in Europe at the moment, the increase budgets are small, and there isn’t much room to differentiate a lot between top performers and employees at expectation).

      However, people don’t just look at the overall amount of the increase. They also look at what it represents compared to their current income. So, as a high performer, my 2% “minimum” increase might be bigger than my colleague’s 4% “average” increase, because my salary is bigger than his. however, if I am the top performer and my colleague isn’t, I’ll still be upset by the % I’m getting, as my performance is not recognised in a proportionate manner compared to my colleague’s.

      To a high-paid high performer, giving a lump sum equivalent to “high performance” increase, is more motivating in my opinion, than giving a “minimum” increase which will not be noticed much on a monthly basis. And definitely, in terms of total cash received in the year, the lump sum is better for the high performer in that case (although there may be a slightly better pension contribution in the case of giving the small increase).

      Obviously this is not an ideal situation, and companies should try to avoid being in the situation of having high performers being paid at the maximum of their salary range. Unfortunately these exceptions happen, and we have to try to manage a non-ideal situation as best as we can when we face it.

      Thanks for your comment and contribution !

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