A Commonsense Rationale for Employee Raises

By Mike KappelSmall BusinessAllBusiness.com

In my group of companies, we conduct performance reviews every six months instead of the usual annual review that most companies conduct. I believe in the value of periodically sitting down with each direct report and discussing how they are reaching their goals. Once a year is not enough, in my opinion.

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With my performance review process, I can recognize employees for their achievements. I can find out what’s going on in their lives and head off problems before they get out of hand. Frequent performance reviews help me retain employees (which is a lot less expensive than hiring new ones!)

Give Employees Time to Prepare for the Performance Review

Employees have several weeks to prepare for their review and complete a self-evaluation. They get the chance to talk up their accomplishments and rate their own performance. I score them on the same factors and arrive at a composite score that I use to gauge their progress.

Some employees dread the performance review (which is why I have tissues on the table, just in case.) However, many employees welcome the opportunity to revisit their accomplishments, set goals for the future, and find out where they need to improve. Many times, the results from the performance review help me decide on employee raises and promotions.

I believe my employees deserve this review of their progress every six months. However, that doesn’t necessarily mean they receive a pay increase every time.

Stamp Out the Entitlement Mindset

I’ve always said, “when it’s within my power to give, I give.” In fact, before I hire anyone, I make sure we are offering a competitive salary. I’ve also been known to give employee raises and bonuses when all signs in the economy were pointing to “no.” However, I don’t want my employees to ever feel they are entitled to a pay increase.

This entitlement mindset — the belief that you deserve something (no matter what you’ve done to earn it) — is prevalent in our society, and it can be a real problem in business. The Millennial Generation may be famous for it, but really, anyone can develop this negative attitude if they’re not careful. I strive to ward off this morale-killer in my companies. I don’t want anyone to become complacent in their work, no matter who they are. Employee raises and bonuses must be earned.

Be Open and Honest About Employee Raises

When it was time for performance reviews during this last economic downturn, I had some hard decisions to make. I decided to write an open, honest letter to my employees to lay out how I was handling pay increases this time around.

In my letter, I explained that as a group of companies, we must live within our means. That meant that some people would get raises, some would receive one-time bonuses, and some would get neither (particularly those who earned sales commissions). I also stressed the importance of keeping this information confidential, although they could discuss the issue with me or their manager if they desired.

My decision was based on two factors: the person’s performance-review score, plus the success of the company or project they were working on. I cannot afford to give employee raises if it’s not really warranted based on their performance and results.

Was this a tough pill for some employees to swallow? Probably. But I felt it was best to treat them like the intelligent adults that they are and tell them the truth.

Emphasize That Winning Does Matter

This is real life. Contrary to what society tells our kids by handing out trophies simply for participating, in business, it does matter that you win. So, I don’t give out raises just for showing up. I give out raises when my employees help our companies win.

The stakes are high, so be upfront with your employees and always give them the truth. Set high standards and expect your employees to achieve results. And then, when it’s within your power to give … give!

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Mike Kappel is the president of Patriot Software, Inc., a developer of online payroll software and accounting software for U.S. small businesses. Patriot Software is one of five successful small businesses he has launched in nearly 30 years. He is passionate about entrepreneurship, and shares advice for small business owners in his blog, Small Business Expert. For more information, please visit www.PatriotSoftware.com.