Our salary review offering ranges from conducting research for the annual review mandate (to the remuneration committee) to developing an increase rationale. We can guide you in the salary increase matrix development so that it is in line with your performance management system and include other variables important in the review process such as the position in the pay scale, the individual’s potential for promotion , etc. Our approach enables an organisation to apply individual increases across the board so that it does not exceed the proposed lift to the wage bill. The methodology used is to incorporate the employee market position to the performance management rating to consistently and fairly apply increases.
Read more on Conducting an Annual Salary Review Exercise
Conducting an Annual Salary Adjustment
Why bother with remuneration surveys and structured annual salary reviews and not simply apply an across the board increase based on CPI?
The reason is that external competitiveness and internal equity are extremely important factors in attracting and retaining the correct skills to an organization. In fact, this is a cheaper option in the long run than having to recruit, induct, orientate, retrain, etc. Employees will generally not approach management or supervisors for an increase. When things really go tough, they are more inclined to put out their credentials in the market and apply for another job.
Below we will discuss some of the considerations and approaches to annual salary reviews.
You Need a Mandate
In order to obtain a mandate from the Executive Committee/Remuneration Committee, some research must be done in order to enable an informed decision on the proposed lift to the wage bill. Sources that will help you with this will typically be the following:
- Large Commercial Banks (economic indicators)
- Financial Institutions (economic indicators)
- South African Reserve Bank (SARB); Statistic South Africa ; Department of Labour (wage movements, economic indicators, minimum wages, bargaining council agreements)
- Remuneration Surveys (competitive market data)
- Business sites e.g. South African College of Business (SACOB), Business South Africa (BSA), etc.
When researching your mandate there is specific information that you require for purposes of proposing a suggested increase. They are outlined below:
- Consumer Price Index (CPI) – Best approach here is to obtain CPI figure for the current year, the forecast for the next year and preceding year.
- Basket of goods and spending patterns for different income groups. UNISA Bureau of Market Research (BMR) tables are the best source for this information.
- Other considerations would be the general state of the economy and any anticipated specific macro-economic changes/factors which might impact positively or negatively on employee disposable income e.g.
- ESKOM Tariffs
- Crop failures
- Oil price hikes, etc.
- Increase forecasts for the specific industry to which you operate
Final considerations for preparing your mandate would be the following:
- Wage negotiation trends and settlements across industry or in your specific sector
- Staff turnover in specific functional areas which might provide an indication of market premiums/shortage of skills in a particular functional area or job/s
- From the Finance Department, an indication of the budget/budget constraints on the wage bill
Based on this research, a proposed percentage lift to the wage bill can be determined.
Where to begin?
Once a mandate has been obtained, the next phase of the project will be the analysis. Prior to embarking on the annual salary adjustment exercise, the analyst will require the following information:
- The latest appropriate industry survey which reflects grade- or job-based quartile information.
- A summary sheet of all the individual performance scores for the preceding period.
- A mandate from the Board/Remuneration/Executive Committee on the budgeted percentage lift to the wage bill for the ensuing financial year.
The Analysis Approaches
There are two approaches to conducting a salary increase adjustment analysis. You can either use a job based analysis approach or a grade based analysis approach. This analysis will be specific to market survey data used during annual review for increase implementation and adjustment. Below we list the advantages and disadvantages of both:
What needs to be in Place to Conduct the Adjustment Exercise?
Firstly, all jobs in the organisation should have been structured according to a grading system or, failing that, some internal ranking system which is robust and can be correlated against the more popular grading systems used in remuneration surveys. Unless this is in place, it becomes extremely difficult to accurately match grades or jobs to the equivalent grade or job in the survey database. One cannot accurately match on a job title as the job title does not always reflect the nature of the job.
Secondly, there should be a reliable and credible individual performance management/review/appraisal system in place which provides for a method of ranking performance between individuals. The moderation of performance score is of high importance.
This is essential if one is going to apply some form of performance-based increase rationale.
The rationale here is that an individual who sits in the lower end of your pay scale or the market range, who is a top performer, should get a higher increase than someone who sits high in the range who is a poor performer. There are two factors that apply when using this rationale:
Pay Range Position and the Performance Score of an Individual
When working with “position in range”, it is always easier to define the desired position in the range by way of a compa ratio to the mid-point of the range. This makes for a more quantitative approach and is easier when designing an increase adjustment matrix. The matrix provides an indication of where an incumbent should ideally sit. A comparison can therefore be made in terms of where the incumbent currently sits as opposed to the ideal position.
In the absence of a logical rationale/approach to the awarding of annual increases, managerial discretion becomes the norm/default which can create serious internal and external equity problems. It also causes defragmentation/dispersion of any formalised wage structure.
Using a Matrix
This is a simple matrix assisting management to make decision on salary increase allocations. This may be designed to incorporate various variables important to the company such as individual performance and potential to develop with the job to where they are positioned in the internal pay scale range or where no internal pay scale has been developed, compared to the market data. The performance to potential matrix example is illustrated below:
Once you have this matrix in place you can then prepare a schedule of all employees, job title, current rate, job grade, current/latest performance review score, and in cases where employee potential is factored in, the appropriate score (based on whatever scale is used).
From a matrix of “performance/potential” versus ”position in range” or ” compa ratio to mid-point of the range” determine an appropriate increase for each individual (to be read from the matrix). The end result should look something like the below:
Once the exercise has been completed, one needs to examine the situation for each employee, particularly in special cases (e.g. exceptionally high performers, fast-tracked individuals and scarce skills) and to remove glaring anomalies.
Check to see whether the total percentage lift to the wage bill falls within the mandated percentage as provided. If not, make a proportionate downward adjustment to all increases in order to meet the budgeted percentage lift.