Salary Increase : Percentages or Quantum?

Introduction

This is Part 3 of my articles on the Salary Increase Matrix

Disclaimer

The views here expressed here are my personal perceptions and opinions. I wrote this article with a desire for the human resource professional’s world to follow a moral compass. Business management have drifted away from ethical management to profiteering. Be aware, this article will reflect my bias.

Compensation Specialist’s Faulty Philosophy

When it comes to giving salary increases, compensation specialists tend to hold  a faulty philosophy:

  • The salary increase must be a sizeable amount with respect to the base pay or the gross pay for the staff to be motivated.
  • Use percentages for salary increases as it is easier to manage.

This faulty philosophy forms the backbone of many of the design of the compensation plans that we have today. As with anything, the impacts over a long period are known only in hindsight.

Here are my 3 basic questions:

  • Did my compensation schemes made better people?
  • How well are we serving society in our area of speciality?
  • Are we getting the business results that we want?

The Power of Compensation Plans

“In your life, there are going to be constant demands for your time and attention. How are you going to decide which of those demands gets resources? The trap many people fall into is to allocate their time to whoever screams loudest, and their talent to whatever offers them the fastest reward. That’s a dangerous way to build a strategy.” Clayton M.Christensen

Compensation plans have as much power over staff behaviors as performance management metrics. In addition, compensation plans have impact on staff’s quality of life. Staff working in organizations make up our society and our economy.

It is only many years after implementation that we discover that the inequality gap between the top job and the bottom job grew wider. When you duplicate that situation across a country, it is a devastating situation for the society, economy and businesses.

Compensation Specialist’s Myopic World

Being a narrow specialization, the Compensation Specialist has its disadvantages. He or she can become overly concerned with the mechanics and getting the job done. If they adopted the faulty philosophy described above, they will just blindly implement it.

Simple Truths

Here are some simple truths:

Truth number 1: There are mundane tasks in the organization that needs to be done. If these mundane tasks are few and do not occur frequently, they can be subsume into anyone’s job as part of the miscellaneous list of tasks to do. If you have not or cannot automate a mundane task, then someone has to do them.

The number of workers that are doing low value job will depend on the nature of the business. For examples, cleaning companies, security companies, food and beverage businesses, hotel staff tends to have more of these groups of people. Even if you pay them a miserable wage, you must recognise how wide is their job scope and how much wage is required to maintain the subsistence level.

Truth number 2: A country where most of people are living only at the subsitence level is not enjoying prosperity. Without money, the mass population have nothing to spend with (low consumption) so it hits businesses in terms of sales revenues.

Truth number 3: The people who are in the higher salary range are receiving a higher dollar quantum for the same salary increase percentage. You can tell looking at the example that I given below.

Truth number 4: We know from our own experience the price of essential items, like food, water, clothes, accomodation, education, medical care do not recognise that one person is either richer or poorer than another and hence adjust itself accordingly. The price for a McDonald meal is the same whether a CEO or his staff is the one buying it.

Similarly, CEO, CFO or COO consumes at the same rate as everyone else. For example, they can eat only a certain amount of food at one time; wear certain number of pieces of clothings at one time, drive one car at one time, sleep on one bed within one room at one time.

Truth number 5: We know from our own experience that outstanding individuals in the industry (great industrialists) such as Steve Jobs are a rarity. Many CEO, CFO, COO are only as good as their middle managers. The majority do not have all round experience, education and training to do their jobs well. Without staff, they cannot accomplish much. However, an organization without a CEO still can run for a certain length of time.

Truth number 6: Ego and greed at the top position is a great destabilising factor. For example, in a number of cases, it were the CEO and the CFO that caused corporate accounting scandals.There are many staff whose livelihoods are affected when businesses closed because of the ego and greed of a handful of persons at the top.

Truth number 7: Business opportunities lie outside the firm, not inside.

Example of a Typical Hierarchical Salary Structure for Small Company

Table 1

Job Grade Min Salary ($) Mid Point

Salary ($)

Max Point Salary ($) Job Level
1 1050 1405 1760 Assistant
2 1320 1765 2210 Senior Assistant
3 1650 2205 2760 Officer
4 2070 2765 3460 Assistant Executive
5 2600 3475 4350 Executive
6 3250 4340 5430 Senior Executive
7 4070 5088 6105 Assistant Manager
8 5100 6375 7650 Manager
9 6400 8000 9600 Senior Manager
10 7000 8750 10500 Director

 

Table 2

Job Grade Min Salary Mid Point

Salary

Max Point Salary 3 Percent 4 Percent 5 Percent 6 Percent 7 Percent
1 1050 1405 1760 42.15 56.20 70.25 84.30 98.35
2 1320 1765 2210 52.95 70.60 88.25 105.90 123.55
3 1650 2205 2760 66.15 88.20 110.25 132.3 154.35
4 2070 2765 3460 82.95 110.60 138.25 165.90 193.55
5 2600 3475 4350 104.25 139.00 173.75 208.50 243.25
6 3250 4340 5430 130.20 173.60 217.00 260.40 303.80
7 4070 5088 6105 152.64 203.52 254.40 305.28 356.16
8 5100 6375 7650 191.20 225.00 318.75 382.50 446.25
9 6400 8000 9600 240.00 320.00 400.00 480.00 560.00
10 7000 8750 10500 262.50 350.00 437.50 525.00 612.50

 

Preliminary Conclusion

My preliminary conclusions are:

  • We need to maintain a ratio between highest mid-point pay and lowest mid-point pay.
  • There need to have a minimum quantum of pay increase so that those at the lowest rank of the organization are paid realistically with respect to the costs of living.
  • The compensation plan for the top position has to be of 2 parts (a guaranteed base pay and an non-guaranteed portion related to the firm’s performance). The non-guaranteed part should tie to how well the top management pursue business opportunities.
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