There’s a lie that’s been handed down from generation to generation, embedded deep within our business culture. It’s not about Santa Claus or the Easter Bunny—it’s about where your annual salary increase comes from.
The Big Lie goes like this: “If you work hard and perform well, your manager will reward you with a great performance review, and you’ll get a big raise.”
The reality? Organizations don’t actually pay for performance with base salaries, they can’t, and, in most cases, they shouldn’t want to. It’s time to dispel this myth and start an honest conversation about pay. Think of it as the “birds and bees” of business.
- The Pie The primary factor determining salary increases isn’t performance—it’s the company’s budget. Think of the annual salary budget as a pie: its size depends on how much an organization can afford to commit to base salaries and what they need to stay competitive. In tough economic times, that pie shrinks, and raises become scarce. No matter how stellar an employee’s performance, increases are limited by budget constraints. The harsh reality: even if you’ve had an “Outstanding” year, a difficult economy could mean a modest raise, if any.
- The Golden Ratio (Compa-Ratio) Another major factor, largely out of your control, is the Compa-Ratio. This compares an employee’s salary to the market rate, and the higher your ratio, the smaller your raise typically is. Ignoring this can price your services out of the market, straining the company financially in the long run.
- Performance—Now it Matters Once budget and market alignment are in place, performance can finally play a role—but it’s third on the list. Even then, performance usually only affects a percentage or two of an increase. Big bumps are rare, even for top performers, as budgets and Compa-Ratios ultimately slow down increases over time.
- The Promise An employee’s potential for promotion can also influence salary adjustments. If an employee is on track for a promotion or elevated responsibilities, their pay might move up the salary band more quickly. However, this has its limits too—after a few career rungs, every professional hits a peak within their organization.
Administering base salaries isn’t glamorous—it’s grounded in the hard realities of budgets, market dynamics, performance, and growth potential. Understanding these can help organizations avoid the pitfalls of the “Pay for Performance” myth.
- Eliminate Performance Reviews: Separate discussions about performance from those about pay.
- Build a Tiered Compensation System: Calibrate for transparency and equity.
- Adopt a Realistic Pay Philosophy: Total compensation should reflect fair pay for the work done.
- Establish Clear Guidelines: Create communication templates to help managers explain salary decisions openly.
- Incorporate Bonuses and Profit Sharing: When justified, use performance-based rewards outside of base salary increases.
Encourage managers and HR leaders to have “adult-to-adult conversations about money” and stop perpetuating the Big Lie for future generations. Let’s shift toward transparency, fairness, and realistic expectations.
