Salary Structures and Pay Delivery

Types of Base Pay Increases

Most companies will deliver base pay increases through merit increases. There are many types of base pay increases including:

• merit increases (performance-based pay)
• general increases (cost-of-living increases)
• promotional increases
• step increases
• skill-based pay increases
• knowledge-based pay increases

And, of course, there are many variations that combine different types of pay increases such as a skill-based pay and step progression combination.

Merit Increases

Merit increases can be based on performance only as either a percent of base pay or a percent of midpoint. They may also be based on performance and position in the salary range with fixed timing, or they may be based on performance and position in the salary range using variable timing.

Unfortunately, some merit pay programs are underpowered. By failing to provide an adequate budget for performance-based increases, the potential impact of the program is diluted. Years of 3% merit budgets can also be a cause. Many companies will provide merit budget percent differentiation of 150% between top performers and competent performers. Consider even higher percentages, such as a differentiation of 250% between top performers and competent performers, when truly attempting to recognize exceptional performance. A merit carve-out can also be utilized by decreasing the general merit pool by a quarter to a half percent. The additional money can then be used to increase the pool for top performers. This can be very helpful to truly recognize top performers in a low merit budget environment. As merit budgets increase due to rising inflation and the marketplace, this may allow companies to differentiate further between top performers and competent performers.

General Increases

Another common type of increase is the general increase, which may be based on increases in the cost-of-living. General, or across the board, increases are not performance oriented.

Usually, they feature 100% participation and it's typically an annual event. They may be given as a flat amount or as a flat percentage. Typically, they are used in lieu of merit increases but can be combined with merit.

Promotional Increases

Just about every organization provides promotional increases. According to a Promotional Guidelines survey conducted by WorldatWork, more than half of participating organizations define promotions by an increase in pay grade, band, or level. It can also be defined as a 15% increase in essential responsibilities.

The size of a promotional increase will usually vary due to the amount of increase in responsibilities. Most employers will limit the size of a promotional increase. A promotional increase in the United States is typically between 5-10% or up to the new salary range minimum.

Step Increases

Single rate step increases (under a step-rate program) provide a fixed pay rate for each job, such as various levels of plumber, electrician, packager, or even consultants. There may also be a training rate. The rate can easily be changed in response to the market or a new collective bargaining agreement.

Automatic progression usually has 5-10 steps with consistent percentage differences. This type of increase follows a prescribed time schedule and the structure can be easily updated to maintain a competitive position to the external market.

A variable step or progression increase allows for variable timing of step increases so that performance can be factored into the pay increase. For example, outstanding performance may allow a 2-step movement where acceptable performance may only allow a 1-step movement.

Skill-Based Pay

Skill-based pay is a pay program that determines individual pay rates by counting the number of work-related skills an employee can perform. Skill-based pay programs pay employees for what they can do rather than for what they are doing. For example, a factory assembler may receive a pay increase upon completion of a training course to use an additional piece of equipment, even though the duties performed, and responsibility of the job remain unchanged because there isn't an opening at present for that type of work.

Knowledge-Based Pay

Knowledge-based pay (also known as skill-based pay) is a type of individual pay administration that has been used for many years for specific types of occupations such as skilled trades, academics, and engineers.

Knowledge-based pay rewards individuals for work-related knowledge gained through formal education or work experience rather than for what they are doing. The thought behind this approach is that the nature and level of an individual's knowledge impacts his or her potential value to the organization.