36, How does the salary increment process work

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The salary increment process involves understanding what kind of budget the organization has to spend on payroll.?

Payroll over here would include the bonus and the incentives.?

Once you have got hold of, this is the kind of budget outlay that is permitted to us, which normally is a result of the revenue, which is a result of the profitability, but most of the organizations have their own system of deciding what kind of budget.?

But two key components of deciding the budget would be the profitability and the total revenue, or in some cases, rather than revenue, total investments that an organization getting in case they have still not reached a profitability, the kind of profitability or the kind of revenue they want to arrive at. So, once you have a total budget, now how do we create the salary increment process??

Now, a standard salary increment process would work by trying to divide the benefit being given to every person based on performance.?

There was a time when there was a socialist approach where people across would get a singular kind of a number of increment, but that has been mostly made a historical activity with about 90% of the organization now following the pay for performance culture, which means you would have a standard benchmark number that I'm going to give, let's say, X percentage increment to a person who's at the middle level performance, and a person who's greater than that would get a greater performance, and a person greater than that would get a greater performance.?

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So, if you were to do a five-point rating scale, a three-point rating scale is where you would decide a number, which is a standard number given to people. And people at four get a greater number, people at five get an even greater number in terms of percentage hike on their CTC. CTC is the total gross salary that a person is getting. And as you grow, go lesser than this, which means medium three rating, if you go to two rating or one rating, one rating normally gets a 0% hike, whereas two ratings sometimes could get a very less hike or even a 0% hike.?

So, one is in terms of this matrix. it's not only level-wise, it's also department-wise and it's also designation-wise.? ? So you create a department-wise, designation-wise and performance-rating-wise matrix. And this is what I'm going to be giving. So it's not necessary to create this three-rating increment standard for all organization. It could be different for a production department. It could be different for an HR department. It could be different for sales department.? ?

And how do we justify this? We justify this by the contributions we are putting into business. It's not that a lot of difference is there, and it's not that we create multiple things. We normally create two buckets.? ?

One bucket what we call as the line function, second bucket what we call as the support functions.?

Now a lot of support functions would normally get into the line benefit, depending on where your organization is performing. But sometimes you also do a differentiation.? That's a management call in terms of how your organization culture is there, in terms of rewards and PA performance. But difference if done is done normally in these two buckets.? ?

In some cases, the third bucket also comes in, which is very high-performing departments, departments which are also called as critical departments, or also individuals who are critical individuals, referred to as niche individuals, referred to as key people, referred to as important people whom you just need to have.? ?

So an example in the consulting world would be the merger and acquisition teams.? They would normally not fall any of the continuum.They would have a separate one for themselves, because there was a time when they were one of the biggest revenue earners, and there was a high degree of differentiation in the market that was happening for them.? ?

Therefore, they had to have a different kind of an increment process happening. So that is from a standpoint of how do you mathematically divide people in terms of giving increments??

How do we decide the increments??

It's always a good idea to understand what is happening in the market outside.?

What do we mean? There is a structured way called as a salary benchmarking exercise or a market making exercise, which many organizations even like us do, to provide this is what the market is doing.?

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The other method is to try and ensure that your recruitment team can give you market information, because they through the year would have the opportunity to interact with many candidates, get at least if not a structured input, at least an unstructured, informal opinion about how the salaries of the organization are compared to other organizations.?

Create a map to understand whereas an organization you stand in terms of salary and then decide what kind of a range we want to give our employees.? That's how you try to work towards creating a salary increment process for yourself.? ?

Creating a structured system for ourselves, a matrix of increment percentage, having a market understanding what the market is giving, and then creating a compensation philosophy, which can be best suited for your organization. The aim obviously is twofold for any increment process.? ?

One, it is to ensure that the employee is motivated to continue working in the organization. It is not to make sure that the inflation is adjusted. It is definitely not to make sure that the employee continues to deliver performance. It is to make sure that they are motivated. So, we need to enhance their motivation. We don't need to make sure that we retain them. A non-motivated person staying with us is of no value to us as an organization.?

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The second is to reward or punish people for their performance. The salary increment process is the biggest tool an organization has to reward or punish people for adding or not adding value to the business objectives.??

So if we can take care of what the impact my increment is having on the performance indicator, it will make sure that as an organization, you have the salary structure or the salary increment process really well designed.?

India HR Guide is aimed at discussing and shedding light on aspects in a crisp manner that organisations in India follow in the area of Human Resources. It is aimed at CEO's, MD's and line managers to understand how various aspects of Human Resources can help shape their organisations journey in India. Our industry leading expert, Mandeep Singh, offers years of accumulated knowledge from having advised clients across sectors, and spread across the remotest corner of the country. Let's make the workplace, a better place.

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