Mohammad Anwar is President and CEO of soft way and co-author of the Wall Street Journal Bestseller “Love as a Business Strategy.”
In today’s job market, where the best-performing employees can get another chance on Friday afternoon, employers need all the help they can get to retain their best talent.
After all, when employees decide to leave, the price hurts. It often takes “between six and nine months of that employee’s salary” to recruit and train a replacement. That number swells to twice the salary for senior and technical positions†
If your business is like most, you’ve probably relied on the common practice of delivering incentives: the annual raise. Annual increases predictably raise salaries, but these widely spaced wage increases often do little more than convince unwilling employees to stay another year. They don’t encourage great performance.
I’ve seen employees tend to compete with each other with more intensity as the decision point for annual increases gets closer. However, once pay increases are given, employees often feel discouraged from continuing at the same higher level of performance because there is no recognition. Someone who has gone for a raise may feel unappreciated, which may lead them to look out for work instead.
What if I told you there’s a better way to implement pay increases that not only retain talent but also encourage high performance year-round? It’s a system of periodic pay increases called spot increases, and it can be the edge your company needs to stop turnover in this competitive labor market.
Timing is everything when it comes to payment
Perhaps the most important difference between annual increases and spot increases is the impact of timing. Rather than giving an annual raise, awarding frequent or multiple raises for better performance, even if the individual raises are small, raises morale and encourages individuals to perform at an even higher level.
Remember that rewards have the greatest impact if they are given on time. As the saying goes, “You must pay the worker before the sweat dries from their foreheads.”
But with annual increments, your employees only see a reward for their good performance once a year. A discrepancy arises between the effort that employees make and the benefit they experience. When performance reviews and subsequent pay increases are months away, employees may not feel recognized or valued enough to do their best work.
On the other hand, spot boosts ensure that rewards and achievements are celebrated in real time, not once a year after many achievements are forgotten. An employee who has been tempted to go job hopping is more likely to stay if he knows he will be recognized and rewarded in line with his performance.
The current system fails to inspire employees
The problem with annual increases and the associated performance management systems is that they are not designed to improve performance.
Far from inspiring, these ranked systems are more commonly used as a payroll compression tool. A competitive annual system pits employees against each other as they compete for pay increases, which can lead to bad behavior and contribute to a toxic work culture.
Employers are generally not eager to give raises; they are more likely to look for excuses to remove them. It’s a system steeped in what I call unforgiveness: the grievances and mistakes that are evoked during performance appraisals and used to compress salaries.
Imagine an employee sitting across from his boss and hearing, “I want to give you a raise this year, but you made that mistake a few months ago…”
The employee may walk away from the meeting with a raise, albeit a smaller one than they expected. However, they are likely to become discouraged after hearing criticisms of a misstep that happened months earlier – perhaps discouraged enough to send their resumes to other branches.
Employees succeed with continuous support
By using a regular check-in system, you can deliver praise and constructive criticism, enhanced by a tangible pay rise, rather than pooling a year’s worth of negatives in one go.
The most effective reward systems provide continuous feedback, coaching, education, exposure, advocacy and sponsorship, all of which are powerful performance enhancers. When you integrate these actions with a spot-raise system, pay becomes a visible and transparent factor in true performance management. Workers won’t spend months wondering if they’re getting a raise this year; they will continuously know where they stand.
To be clear, no system, including spot raises, is free from bias. You should still be on the lookout for favoritism and other subjective influences that can affect trust within your organization. Spot boosts won’t dissolve toxic culture either. Good behavior and good treatment at every level of the organization are still the foundation for success. However, by combining a healthy company culture with pay increases and making room for frequent and ongoing dialogue, you can build trust with employees, reward your best performers and support your employees who may need help.
Rethink your reward system
With how difficult it can be to replace employees in today’s job market, preventing attrition is probably one of your top priorities.
Any organization can write off their annual raise budget over 12 months to change the frequency with which they distribute raises. In a spot-raise system, the organizational budget remains the same, but a higher-performing employee receives more and a less-performing employee receives less, which is more equitable.
Fair pay increases given periodically – as often as every month – go a long way toward making pay increases more motivating, meaningful, and timely for your employees.
The reactions I have seen within my own company have been phenomenal. Moved to tears, employees have said the recognition is far more important to them than the raise itself. It wasn’t just a raise they received, we made this moment a celebration of their achievements.
Morale and motivation rise when employees feel that you have noticed and appreciated their hard work, and this is reflected in their future performance.
By moving to a spot-raise system, you can build a feedback loop of performance improvement and build a workforce of people who feel heard, valued and inspired to do better – people who are happy to stay with your company for a long time .