During this time of severe economic recession when employers are seeking wage concessions, it may seem odd that I am writing about wage increases. But annual pay raises have become so much a part the American employment experience that once the economic trends turn, employees will be seeking wage increases and employers will be likely to grant them.

Pay increases can often have the opposite effect than intended. In a past life, I worked for a Fortune 100 company which used a variety of pay systems during the years I worked there. The program that was in effect when I started was a two pronged approach. There was a flat dollar amount awarded to all employees in the same or similar wage scales. For example, employees in the lowest salary scales would each receive $350; the next group of salary scales would receive $500, and so on, and so on. The other portion of the annual wage increase was merit based. The major problem with the merit based portion was it only offered a merit pay differential of $50 per year between poor and top performers. So my top performers received less than $1 per week before taxes than poorer performers in the same unit. Do you think this fostered improved performance? Quite the contrary. It fostered mediocre. Both my top performers and poor performers were both asking the same question- “Why bust my butt for a measly buck a week?”

The company migrated to a very sophisticated program with a salary increase matrix based on performance rating and position in wage scale. This was a more equitable approach. The program was geared at accelerating top performers’ pay. It therefore offered the highest percentage increases to top performers in the lowest third of their pay scale. But it too had its flaws. Once top performers reached the top third of their pay scale, they often weren’t eligible for a raise because they were too close to the maximum wage for their job. They either went on slow down (no raise for 18 months) or received a paltry increase. Again this did little to motivate these employees. “You did a great job, but I can’t give you a raise, so keep up the good work”. Yeah, right.

My small business clients often take a different approach. They give each employee a” buck” raise each year. Is that a fair? They think it is. Everybody gets the same and nobody can complain that someone else got more than they did. That is true but the complaints usually take different forms. There are complaints that poor performers get the same as top performers and that lowest paid employees get a much higher percentage increase than higher paid employees.

It is difficult to come up with a wage increase program that is truly equitable to everyone.

The other problem with annual raises is that they reward for past performance. Giving an employee a raise does not guarantee you will receive the same level of performance which resulted in the raise in the first place. Some employees have a mythical wage rate at which all is good with the world. I have heard employees making such comments as “if only I were making $xx/hr or life would be great if I was making $xx/hr”. Once they achieve this wage goal, some employees begin to “coast”. Their performance often levels out or even declines once this mythical goal is achieved.

Yet another problem is raises are forever. Once granted they are difficult to rescind.

Not a Coke or Pepsi, or even an RC But a Cost of Living Adjustment.

COLA's are the most equitable way to increase employee wages. They are neither artbitrary nor subjective. They are equitable to the employee because they help the employee keep pace with the increase in the cost of goods and services. They are fair to the employer because they control the cost of wage increases to the level that is occurring in the marketplace.

COLA's should be applied across the board. After all, everyone experiences the same increase in the gallon of milk regardless of their position or their level of performance.

COLA's should be based on a reliable index. The Bureau of Labor Statistics publishes regionally adjusted consumer price indices that I highly recommend. Using these indices will ensure your COLA is consistent with the price increases being realized by your employees.

But how do I reward employees based on their performance? Use performance based incentive plans.

Performance based incentive plans are the best way to recognize your employees' contributions. If structured properly, incentive plans not only reward positive performance but also allow the company to maintain wage rates in a range consistent with the marketplace

The type of incentive plan that I recommend is often referred to a gain share plan. Employees share in the gains a company realizes above and beyond those planned for the year. What does that mean? Your company has established the following goals: $1 million in revenue with net profits of 10%. These goals are based on your staff performing at the level for which you pay them. If the company achieves its goals there are no performance awards. It is only when the company exceeds its goals do incentive awards apply.

Using the goals indicated above, the company does realize $1 miillion in revenue but only achieves net profits of 9%. The company as a whole has failed to meet expectations. No one receives an incentive award or, in common terms, nobody is paid a bonus.

If however the company achieves the $1 million in revenue and achieves 12% in profits, the extra 2% is shared with employees. The company has exceeded its goals and therefore everyone is eligible for an incentive award or bonus.

Individual employees share in the incentive awards based on their individual performance. Weighting factors by position are also utilized to differentiate the impact a position has on the overall results. For example, a foreman may have more impact (good or bad) on the company's results than the crew that works for him/her. The foreman position would have a weighting factor assigned to it to recognize this difference.

Include all employees in the incentive plan. The office staff, the maintenance staff and other support operations contribute in their own way to the success of the company. The only group that may be excluded is the Sales team, but only if it has incentives built into the sales compensation plan.

Where possible, it is best to distribute incentive awards quarterly. By doing so you reinforce the performance that contributed to exceeding its goals.

Let me make a further case for incentive award awards versus pay raises.

Cost - Pay raises increase the cost to the company. Incentives don't - they are paid out of excess profits.

Reward - Pay raises reward past performance. Incentives reward current performance.

Teamwork - Pay raises focus on individual achievement. Incentives focus on individual contribution but only in relationship to achieving overall goals. Improved teamwork can be realized through incentive plans as employees realize their incentive award can be impacted by their co-workers.

Duration - Pay raises are forever. Incentive awards only apply to a specific period of time and do not effect future wages.