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A question from managers that often comes up during the annual performance review cycle, is what merits an salary increase that exceeds the guidelines? Here is an example of how one company dealt with the issue. It is an excerpt from a memo from the chairman of the compensation committee of a midsize firm.

Two principles were first stated:

1. Reasons for salary adjustments and promotions must be fair and consistent across all departments in terms of amount of experience required (time), demonstrated performance (quality), size of increase and level of promotion (amounts).

2. The standard for comparison is the marketplace and not the department. This means a survey-based salary structure determines the starting and subsequent salary levels. For "above average" companies, midpoints for the salary range are often set at the 75th percentile of the market range, or higher. The salary range for the level reflects the differing amounts of experience within that job level.

Given the above, they developed the following rules:

1. Promotions higher than 3 levels are not acceptable. It is better to create a new level, more junior position as an intermediate step, and then set objectives for what it takes to achieve the additional level promotion. These should occur in a 6-12 month time frame, based on performance, but should not be less than 6 months. Promotions which are more aggressive than this create unfairness between departments and set a level of expectation which the business can not support long-term.

2. Adjustments in addition to merit and promotion amounts are only for resulting increases which fall below the salary range minimum or for cost of living differentials between regions in the case of transfers. Adjustments for equity among department members is not a sufficient reason for an exception. A peer group's salaries should differ across the salary range for a given job level based on the amount of experience in and before the job.

3. A prorated merit increase may be added to the promotion increase at the time of promotion. This would be a prorated portion of the merit guideline amount for the number of months since the last merit increase. In turn, the subsequent annual merit review amount would be prorated for the number of months since this promotion.

4. The sum total of the merit, promotion and adjustment increases will not exceed 15%. In addition, no more than two increases may be given during the calendar year (aside from department or company-wide adjustments). Two increases in one year will require a back-up rationale in addition to superior performance. Cases for above 15% increases will only be considered for extraordinary performance and demonstrated increased responsibilities over time. In general no more than 2% of all salary increases (e.g., 3 out of 150) for a given year should need to go to senior management for approval.

It is important that we as managers recognize that top level and above guideline increases are extraordinary. We have a responsibility to communicate to our employees that top level guideline increases and promotions place an employee in the top 10-15% of annual percentage increases at our company. Above guideline increases place an employee in the top 3-5% of increases. This is a significant recognition of achievement and merit. Such an employee will be one of the most recognized and rewarded employees at the company. Let's make sure that this type of salary action is always communicated in this positive, comparative light.
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