The cliché of engagement starts with that someone kneels down before the other and takes out a tiny little box. This very beginning of the process already raises excitement. The main message is already delivered, yet, the actual representation still matters.
The underlying myth is:
“Salary increase is always a good thing and it makes everyone happy.”
It is hard to believe that a positive act like salary increase can get derailed and it often gets. What leaders miss is that it goes well beyond the simple maths.
Salary increase is not just an economic matter. However, many companies think of it just like that. Doing so, they miss the essence of it. And doing so, it remains a simple box instead of the box of the engagement ring. But there is a lot more going on.
During the recent inflation period companies have had to deal with the pressing demand of employees wanting more salary to compensate for the effect of inflation. Some could offer an increase, while others cannot. If you cannot, don’t make it worse by providing an economy lecture to employees that the company can only pay the salaries if there is enough revenue.
Chris worked for a company that faced the same issue of inflation as many others. Inflation made the company costs increase at a super high pace, so it was harder and harder to manage the profit expectations of the company. On the other hand, the employees already felt the consumption prices go up. The company wanted to handle the situation and to increase the salaries, but they were just not there yet, they needed some more time to consolidate the situation. The tension increased, too, so the management had an all employee forum to talk about it.
They tried to create a transparent picture, so they showed how the costs had risen. They appealed to the rational employee who fully understood the economics and the corporate finance. They talked about macroeconomics, inflation and global effects. They explained how they needed to modify or even cancel some of the investments.
The only thing they did not talk about was the psychological burden every employee had been carrying. While there was a major concern in everyone’s life. Their work was worth less all of a sudden, because their salaries were enough for less goods. They had to say no to things they could say yes to before. They needed to make some hard decisions. They became unsure how they could take care of their children. This had nothing to do with economics. People needed empathy. Empathy they did not get from their management.
Addressing an emotional difficulty, never start with rational arguments. First show empathy and support, demonstrate that you understand the situation and you are there for your colleagues. At this stage, you do not have to solve any of the issues. You just have to be with them and acknowledge their pain. When the basic security is reassured, you can get the others involved into the search for rational solutions.
Chris got no empathy from the top management. While Chris’s boss made it even worse. Chris was told to keep on pushing the performance and delivering the results. If Chris could create extra value, he could get his increased share of it.
The problem was that Chris had already delivered over the targets. He had achieved the highest ever financial result of his product line. In this sense, he had already produced his possible higher salary. Yet, he got nothing.
Referring to capitalist logic is only valid if you really play by the rules of the capitalist logic. If it remains an empty argument, you are building a culture of no trust.
Some months later the company could manage to increase the salaries. After handling the emotional situation badly, the management finally could prove that they had been working for their employees. But the bad decisions were not over.
There was a general 10% salary increase which HR communicated publicly as they wanted to pouch the employee engagement. While the managers were told to differentiate among the employees. Why was it wrong? They set the expectations to 10% which was not guaranteed for everyone so they created additional threats in times of uncertainty.
Differentiated salary increase is a zero-sum game. You can reward the high performers at others’ expense. Let’s say there are two employees with the same level of salary. If you increase one’s salary by 12%, you have 8% left for the other so that you remain within the general 10% of increase. But you have already raised the expectations to 10% in the context of inflation which hits everyone.
What’s going on here? Central HR thinks of the total amount of salaries, while the mid-level manager thinks of the individual salary. The former is a company cost as HR is often a cost centre, the latter is a kind of remuneration and more importantly a living. These are the two sides of the coin. The conflict of the two can generate tension even in case of a positive event like salary increase. A tension the mid-level manager has to deal with and resolve.
So the mid-level manager needs to develop a plan on how they can give positive feedback for everyone even if there are some who get a bit less proportionally. How do they communicate the bad news in a positive way?
They might talk about the nominal amounts instead of the percentage. Let’s say, the employee has a salary of €3000. If you give them less than 10% (which would be 300), you can say they get 250 which can be quite okay as it is visible and tangible enough, it can be translated to a bigger purchase. Many of the employees would still calculate that it is less than 10%, but the framing has already changed a bit.
Managers might talk about the share the employee gets from the total amount of nominal increase that is allocated to the entire group.
Employee 1 has the highest salary and gets only 6% increase compared to their own salary, but compared to the total amount of 1200 the entire group gets, their share is 15% due to the higher base their salary means.
The mid-level managers are forced to use tricks like these to resolve the unnecessary tension they get from top management.
When employees are already differentiated, further differentiation makes limited or no sense.
In terms of performance, there are better, average and worse members in many teams. Their salaries probably already show the difference, the better performing team member earning more money. The good part in percentage based increase is that the different base already aligns the differentiation: the higher the base salary is, the bigger the nominal increase is.
Therefore keeping the general percentage of increase can do the job on its own.
Why is it important? To boost someone’s salary significantly, you have to gather a big enough amount of money from others in a zero-sum game. Taking it from the lower salaries is more painful proportionally than taking it from the higher salari(es). Yet, you might “punish” the better colleagues if salaries represent the performance. Also taking the reserve from the lower salaries transmits the negative message that a junior or less complex position is always worth less, but for the sake of the common success, you need to have different roles on your team.
So always think twice if percentage based salary increase is the right way to give feedback about the performance.
Learning from the case Chris had to experience, there are some ways how you can handle the salary increase better.
The most important is not mixing the general salary increase due to the macroeconomic environment and the settling of salaries as a result of the performance. You have to have separate budgets for the two. If you want to settle a salary or you want to acknowledge an achievement, create some reserve for this. You might even save it from the general increase budget as the employees won’t know if you have 9% for increase in total or you have 9% for general increase that they will see and you save the total amount of the additional 1% for recognition. This way you can create a win-win situation instead of a zero-sum game.
Another way is not communicating the general percentage so that you don’t generate expectations. The company wide general message remains about the fact of the increase and everybody gets their exact figures in private. This way, the credit goes to the direct leader and not to the HR department, but if HR is not a cost centre, there is nothing to be mended by a central message.
Think forward. If you want to create the budget for recognition, you have to plan with it. Can you define a transparent reward system that you can meet and maintain in the future? To do so, you need to separate the budget for that regardless of the economic environment. When budgets are fully allocated and spent, you can create the necessary room for this change in the next round of a possible increase when the company reaches the next level of profitability.
Remember, salary is far more than an economic aspect, emotions and respect are associated with it.
