Salary Increase Planning

REWARDING & RECOGNIZING YOUR EMPLOYEES

An organization can reward and recognize its employees through many different Total Reward vehicles. These vehicles can impact the following:

• Base pay
• Short-term incentive plans
• Long-term incentive plans
• Benefits
• Work-Life Effectiveness
• Recognition
• Talent Development

Base Pay

Base pay is the gross pay that employees receive in return for their labor. When base pay for employees is increased, this increase normally becomes a fixed cost. Once an increase is applied to an employee’s base salary, it typically can only be reduced in the future by terminating the employee, reducing hours or by cutting their pay — none of which are desirable options from the employee’s point of view.

Salary increases are occasionally delivered as a lump sum increase. A lump sum increase (also referred to as a lump sum bonus) is not a fixed cost and may be used in lieu of increasing an employee's base salary. Lump sum increases are commonly used to recognize and reward employees who are highly paid compared to the labor market (e.g., over the salary range maximum). It may also be used as a method to control labor costs.

Short-Term Incentive Plans

Short-term incentive plans are variable pay plans consisting of bonuses and other short-term incentives that organizations use to reward individual, team and/or organizational performance. They are a variable cost in that incentives are paid when the organization or individual is doing well and low or nonexistent when the organization or individual does poorly. Incentives can also be self-financed through business results. Typically, short-term incentive plans are designed to measure performance periods of one year or less.

It is important to note that variable pay does not increase the base pay of the employee. A well-designed short-term incentive plan will also not increase the fixed compensation costs for the organization. More and more organizations are using variable pay to provide flexibility in their compensation costs. Additional information is available in DLC Course 75: Creating a Variable Pay Plan.

Long-Term Incentive Plans

Long-term incentive plans are typically provided to reward and recognize the long-term performance goals of an organization. It may support the long-term retention of executives, senior management, and key employees since long-term incentive plans may recognize a 3-5-year performance or vesting period.

Long-term incentive plans may utilize one or more of the following vehicles for compensating employees:

• Cash
• Stock Options
• Restricted Stock
• Performance Units
• Other

Equity compensation represents a form of ownership interest in a company, typically through stock options or restricted stock.

Typically, equity compensation includes a vesting provision, so employees gain rights to acquire, buy, sell, or transfer their equity compensation over time. Equity compensation may generate no income or extraordinary income depending on the growth of the stock price and success of the company. Equity compensation is intended to encourage employee retention over the long term.

A long-term incentive plan also does not increase base salary expenses. Also, a well-designed long-term incentive plan will not increase the fixed compensation expenses of an organization.

An equity compensation program can be complex to implement so soliciting sound legal, accounting, and tax advice is important.