When Raises Encourage Poor Performance

Yearly raises are a great opportunity to provide motivation for your team. Done poorly however, you can actually encourage under performance by your employees. As a manager you have or will have the opportunity to allocate yearly raises for your employees and either send a positive or negative message to your employees. In a lot of companies the raise process entails distributing a bucket of money to the individuals on your team. The total money in this bucket is generally calculated by taking a set percentage of every team’s salary. For this example let’s use 5%. So if you have a team of 10 people each making $100,000 a year, your total bucket will be 10 x $100,000 x .05 = $50,000. In many companies the employees are either told by management or find out through the grapevine what the average raise is. Even if you think it is a secret, you can expect that all of your employees know what the average raise percentage. There are two main schools of thought on how to distribute this money to your employees. We will call the first method “equal raises”. In the equal raise situation each employee receives a 5% raise. The second method is called “variable raises”. With variable raises some employees get more than 5%, some get less, and some get exactly 5%. Equal raises set a bad example and send a negative message to your team. When everyone gets the same percentage raise, the exceptional employees know that they are being rewarded the same as the under performing employees. The under performers know that even though they don’t contribute as much, their raises are the same as top performers. This is a dangerous message that encourages under performers to remain at their status quo and let’s over achievers know that they are not being rewarded for their exceptional work. Variable raises on the other hand let employees know where they stand and how their manager views their work. When over achievers are given more compensation it encourages them to keep up the good work. When under performers receive a raise (if any) less than the average it is a signal that they need to be doing something more. As a manager it is your decision on how to allocate yearly raises, but you should be very aware of the signals you send to your employees.