Many organizations have a process by which they administer increases to employees. The vast majority of companies provide increases annually and base it, in part, on an employee’s performance evaluation and the employee’s compa-ratio, or some other similar calculation. Sometimes decisions about increases are left to the direct manager, and are completely discretionary. Often, small- to mid-sized organizations have compensation practices that don’t offer managers much autonomy. Conversely, some larger organizations seem to reach a point where individual departments, or persons, have control over such decisions.
Discretionary pay can be given as a supplement to, or a replacement for, the annual base increase and is something that is based in part on a company’s culture. Below are a few things to think through as you consider what’s right for your organization.
Advantages of Giving Managers Flexibility in How They Allocate Pay Increases
- Leverages a manager’s individual insights: It’s impossible to create a perfect compensation system. Your process will always need to have exceptions and flexibility. Putting some of the decision-making power directly in the hands of your managers gives you the ability to take advantage of the insights that only someone with intimate knowledge of a situation can provide. That can mean the difference between keeping and losing a valued employee.
- Increases the likelihood of manager buy-in to the salary ranges: It is possible a manager won’t agree with the company salary ranges for all of their employees. If that is the case, giving them the ability to allocate additional funds could help off-set their concerns.
- Empowers managers: Managers want to be involved. They know things about their team that can’t be quantified even in the best performance review. Perhaps HR wants to empower them. Or perhaps you are creating a decentralized culture. Giving managers access to discretionary increases lets them be involved in a significant way and decentralizes the process.
- Creativity: There are a lot of criterion that can determine what justifies an increase. Giving managers control over a portion of annual increases allows them to be creative in how they allocate pay.
- Reduces the red tape: You are going to have managers who ask for exceptions to HR’s recommended increases. By giving a little more as a discretionary increase, some managers, who otherwise would not be satisfied, will be. Instead of an increase in requests for exceptions you are likely going to see a reduction in exceptions.
- Your company culture: Your company may have a culture that wants all things decentralized. By using a discretionary merit tool, you can send another strong signal that you trust your managers to make the right decision, thus reinforcing the emphasis on responsible management decisions.
- Selectivity in who is eligible: Technology can allow HR and executive teams to use discretionary base increases just with specific positions or individuals within the company. This may be used for hot jobs or roles that the company knows will be costly should employees leave.
Disadvantages of Giving Managers Flexibility in How They Allocate Pay Increases
- Potential confusion: Decentralizing processes inherently increases the risk of confusion. Putting decisions in the hands of managers means that each individual has the burden of thinking through the decisions they need to make. If this is done just once a year, managers may not have the experience to know which criterion they should use to make the decision, nor feel they have the expertise to do so.
- Increases inequity: Giving managers the ability to allocate increases as they like also means an organization may end up with larger and less defensible employee pay issues if things aren’t kept in check and well-communicated.
- Disappointed employees: Managers who give more money to certain employees and less to others may increase the risk of real or perceived discrimination. Your organization would have to weigh the perceived increase in potential risk with the possible benefits, and make sure that the communication strategy is well-thought out and executed, as mentioned in the previous point.
- Additional efforts: Involving managers in increases can also be an administrative burden. There need to be processes, training, checks and balances, and approvals - all of which may require exceptions and questions. Good technology will need to be set up and leveraged.
How can good technology help?
Too many organizations rely on spreadsheets to manage their annual increases. Spreadsheets pose security risks, are time consuming, and are plagued with inaccuracies. Use a rules-based automated compensation application to help facilitate the process.
A rules-based application will allow you to create guidelines for how individuals should be compensated and how much flexibility managers have in the process. With the guidelines in place, managers can log in to the application to contribute their portion. You’ll be able to monitor progress and analyze results from right within the application.
Organizations are changing the way they execute their performance management processes and changes in compensation trends are also being considered. PWC reports that some organizations are considering shortening performance and reward cycles from an annual process to a more real-time scenario. Consider whether that change, a change to your manager’s involvement, or a change to the technology you use, might propel your organization forward.
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