The best order in which to apply salary increases in any organisation

Salary review time is approaching fast and so today I wanted to write about  the order in which we apply salary increases. Does it matter ? Or is it totally irrelevant to what you are trying to achieve when going through your internal and external equity reviews ?

First, let’s have a look at the different types of basic pay increases that you may find in quite a number of companies in the UAE and GCC.

• The merit increase : this one is related to the individual. Usually his or her performance rating is taken into account, sometimes also their comparatio (position in the internal salary range for their job) or market ratio (how much the person is paid compared to market).
• The Cost of Living increase. This one may also be called general increase, or collective increase. It applies to all employees irrespective of their performance rating or their current salary. Usually this increase is driven by inflation or CPI (Consumer Price Index) increase, and it is supposed to somewhat cushion, well… the increase in cost of living.
• The adjustment increase, also sometimes called “special increase” : this increase may be applied to some specific people or categories of population, in order to “adjust” their compensation to a special situation. For example, a whole group of your employees may be paid below the current market rate. This can happen if you recruited most of them at the same time and then did not add significant numbers of people to the pool – thus sometimes falling behind especially if your past increases were more conservative than the general market. Then, an adjustment increase may be a solution as it impacts only employees that need it, and not your entire employee population.
  
• The promotion increase : well, this increase is pretty much self-explanatory. You grant it to employees who get promoted.

Now, let’s take a look at the philosophy impacting the order in which they are applied to your employees’ basic pay.

You should always go from the most general to the most individual and rare increase.

The logic is simple : at each step, you make a decision whether to apply that increase or not, and even, for some of them, which amount to apply. Given that the amount may be based on where the employee will stand as a result of the previous increases, then it makes sense to start with the collective, generic ones and work you way up through the more specific or singular ones.

So you start with the Cost of Living increase, which applies to all employees except maybe the newest of new hires (because they have not been exposed to inflation yet since they are new).

Then you move on to the merit increase, as this one also applies, although with varying percentages, to all employees. Exceptions will be the poor performers obviously, and the newest of new hires as they have not spent enough time yet for their performance to be evaluated and rewarded properly. (Plus, they have just been hired so are supposed to be the closest to the current market rate).

Only a  minority of employees should be promoted each year, so the promotion increase related to their new, higher position is the next one to come in line. Depending on your company philosophy, the promotion increase percentage may be the same for all employees promoted, or it may be based on a budget approach with a guided range of “acceptable” increase, or it may even be a different percentage based on job family or grade/job level, or any combination of the above.

And finally, you may or may not consider paying an adjustment increase. This one could apply for newly promoted employees if the regular promotion increase did not bring them to the minimum of the salary range for new grade, or whichever comparatio you deem appropriate. Or it may apply to a group of employees which your latest compensation survey results showed are lagging behind market, and you don’t want to have retention issues with. Or it may apply to a group of sales support functions that were previously eligible to a sales-related incentive and are now moving into the general population incentive scheme (so their fixed/variable pay ratio needs to be adjusted over time). Or it may simply be some individuals that require special attention. Having performed all the previous increases on them, means that your adjustment increase relates to their new pay and job and is therefore as appropriate as possible.

So in short, in order to be logical and send the right message to your employees, apply increases always from the most generic ones to the most individualised ones : cost of living, then merit, then potential promotion, and finally adjustment. And if you don’t want those efforts to go unnoticed, don’t forget to communicate at least the principles behind how you manage salary reviews in your organisation !

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