The reviews are in

STAFDA human resources consultant Edgar S. Ellman contends that employees need to be evaluated at least annually whether or not they get a raise.

by Edgar S. Ellman

A recent survey of business executives conducted by a trade association ranks employee compensation and performance appraisal as the second most difficult personnel problem. The first is how to increase productivity of employees at every level.

Nearest and dearest to the hearts of all employees is the need to know what the boss thinks of them, how they are doing on the job and how they can enhance their opportunities in the company.

Performance appraisal is a form of recognition. Therefore, it is incumbent upon management to recognize this need and use it as a tool for developing more profitable employees.

Every well-written employee policy handbook contains an up-front policy for evaluating performance and awarding wage increases. If you don’t have a policy on this topic, you might as well not have a handbook. If the policy is too vague (e.g., “From time to time we will rate our performance and consider you for a raise.”) it might as well not be written.

Employees want to know how and when they will be evaluated and when they can expect a decision on whether or not they will get a raise. Notice I said “whether or not.” It is better to explain to an employee that you will not grant a raise than to leave him or her guessing. An informal policy of waiting for an employee to ask for a raise is a non-policy, and it is looked upon by many employees as an indignity or even an insult. I recall an instance when an employee finally asked for a raise, got it and then quit the next day.

Here are some questions I’ve been asked repeatedly over the years by distributor owners and managers:

1. Do we have to give raises every year? Even if we are not making money? Certainly the answer is no if you are not making money, although even in such circumstances you might grant a token increase to some employees. But if your profit picture is good, then most employees expect increases. Why? Well, even though you don’t want to tie your increases to the cost-of-living index or the inflation rate, it is a fact of life that landlords raise the rent every year, utility rates increase, food prices go up, etc. Employees are well aware of the extent to which even low inflation erodes their real earnings. In today’s economy, good employees may look elsewhere if they feel they deserve a raise.

2. Should we give everyone a raise? Obviously, no. There will be some employees who do not merit an increase. But they still deserve an explanation. Others (excluding new employees who may have been increased recently) will expect to be rewarded.

3. Wouldn’t it be best to give everyone the same percentage raise across-the-board based on a given percentage basis, that is, based on each person’s present pay? No. It’s not a good idea because this doesn’t take individual merit into consideration. Whether or not you tell employees that is what you are doing, they will catch on. This would reinforce the attitude that no matter how hard one works, everybody gets the same raise. However, it is all right to compute an individual employee’s raise on a percentage of his present wage, and say so at the time you give the raise.

4. We have a rule that employees may not compare their wages or bonuses. Is that a sound idea? No, it isn’t if for no other reason than it is of doubtful legality. The National Labor Relations Board has deemed that such a rule deprives employees of their right to compare their common plight or to be represented by a group such as a union. Besides, how in the world could you enforce such a rule? Would you fire an otherwise good employee for violating it?

5. We’d prefer to give hefty bonuses when profits are good, rather than commit ourselves to raises that are permanent. Is this a good idea? It has some merit, but I don’t think the bonus should be too big a percentage of an employee’s annual income because it is something the employee cannot count on in the future. Besides, it can set a precedent. A raise based on good performance is more rewarding than a bonus based on profits over which many employees believe they have little control.

6. Must we go on raising an employee indefinitely even though continued increases will push the wage up higher than the job is actually worth? After all, we don’t want to pay a receptionist more than the going rate. This is a tough one. Big corporations and non-profit organizations establish sophisticated wage and salary administration plans that set caps on the maximum pay for each job. However, many of these programs allow for a minimal or token increase annually. You can set up a system of job evaluation, but it might require a consultant. Usually, attrition and pregnancy take care of endless increases, providing you hire new people at an entry-level rate.

7. Should we evaluate employees annually on their individual anniversary dates, or should we do this each year during a particular month? Suit yourself. Frankly, I prefer the anniversary date method because it causes less of a stir in the company. Either way, everybody tends to “clean up his act” when raise time comes around. The anniversary date method requires some additional paper work to make sure that the date doesn’t slip by. You should have a designated personnel administrator anyway, someone to answer questions about personnel policies, wage computations, insurance matters, etc. (Several of my clients have a policy of sending employees a congratulatory card annually on their anniversary date of employment.)

8. When we promote an employee to a higher level position or significantly increase the responsibilities of a job, should we grant a raise at that time, or wait and see how well he or she works out on the new job? Give a raise right away. A promotion without a raise is nothing to come home and talk about.

9. Aren’t we supposed to sit down and talk to each person at the time of an appraisal? And, should we do this at the same time we either give or don’t give a raise? Of course you should. Each employee deserves an annual review, at which time it is proper to discuss mutual goals and award a raise, provided it is merited. After all, the two are connected.

Some firms ask the employee and his immediate supervisor to fill out a rating form and then compare answers in the interview. However, the effectiveness of this method depends on the supervisor’s skill.

In summary, your HR policy should include a systematic method for annual merit review and wage evaluation. It lets everyone know the boss cares.

To obtain a copy of Edgar Ellman’s Performance Appraisal Rating Form, send $5 to E.S. Ellman, 300 N. State St., Suite 3809, Chicago, IL 60610.

This article originally appeared in the STAFDA November 2002 issue of Progressive Distributor. Copyright 2002.

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