I own a small business (6 employees) and up until now we have simply made a number up for annual salary increases (ie – you did well, here’s a £xxx pay rise).

However we are growing and I want to formalise a calculation that reflects the businesses current performance, current inflation, employee performance and time in position. This way if we are doing well we can reflect that in an increase, they get a bonus for being with us longer term (ie 1% per year after 3 years).

All seems relatively simple however should I base it on the current inflation rate (ie 2.3% as stated by Bank of England or an annualised inflation rate (ie, what is the average over the last 12 months)? If the latter, where can I find that information out?

At the moment (work in progress) an example calculation is something like this:

Employee A – Earns £20,000 + [Financial position 0%] + [Inflation 2.3%] + [Performance -1%] + [Time in position 0%] = 2.3% (£460 p.a. salary increase)

Employee B – Earns £20,000 + [Financial position 0%] + [Inflation 2.3%] + [Performance +3%] + [Time in position 0%] = 5.3% (£1,060 p.a. salary increase)

Employee C – Earns £20,000 + [Financial position 0%] + [Inflation 2.3%] + [Performance +3%] + [Time in position 1%] = 6.3% (£1,260 p.a. salary increase)

Can anyone see any flaws in this? Have any thoughts? Cheers

Don’t suppose it actually matters as long as the formula is applied consistently to all staff and is seen to be “fair” and achievable based on predetermined criteria.

I’d take consistency and fairness against known targets over an employers subjective guess any day.

I would have thought you would need something fairly objective to measure performance to ensure its fair. Otherwise sounds like a decent boss to me.

IANAHRM but wonder if having performance as a specified item is a good idea unless you already perform regular documented performance evaluations to back up low increases for poor performers.

Haven’t they made pay increases just because you’ve been in a job a certain time illegal now? I might be wrong but it’s like that at my place now and others.

The only flaw I see is that you’re obliged to make at least inflation based increases every year, which is very good of you – but with inflation currently coming from external forces (exchange rate issues) rather than increased GDP you’re potentially liable for large increases in salary irrespective of performance or company performance – looking at a worst case scenario you might find yourself in a few years looking at a 5% inflation matching increase in a tough market.

If it’s a framework for offering pay rises your risk is limited to pissing off staff because of a failed ‘promise’ if it’s contractual you face having to ask staff to forgo increases to save jobs etc or facing legal action to enforce them.

I’d suggest a tiered approach if the company is profitable you get £x to cover inflation, if it’s good you get £x more and finally if you’re performance is good enough you get £x for performance and time in service.

I say “suggest” that was pretty much how the RBS pay scheme worked. It made sure you cared about company performance as well as individual

Would performance not be better delivered as an annual standalone bonus rather than in salary?

IANAHRM but wonder if having performance as a specified item is a good idea unless you already perform regular documented performance evaluations to back up low increases for poor performers.

We do an annual Appraisal where we review past goals and set new ones for the coming year, then 6-monthly ‘one-to-one’ sessions where we review how they are getting on in a more informal environment to see where they are not being able to achieve goals so we can offer help and assistance.

The way we were thinking about applying the scoring was like this:

Our financial position (for example Below expectations -1%; As expected 0%; Above expectations +1%)
Inflation (currently 2.3%)

Performance (for example Well below average -2%; Below average -1%; Average 0%; Above average +1%; Well above average +2%; Exceptional +3%)

Time in position (to encourage staff loyalty ie, 1% per year after 4 years continuous employment)

Of course there could be an instance where inflation is low and the employee performing well below expectations leading to a negative ‘increase’ but naturally we wouldn’t decrease pay however they would not receive an increase.

genuine q what is the point in setting expectations if they must exceed them to get a pay rise?

I prefer to be told what to do, go away and do it and then say look I did what you asked.

I am also not that sure that a sample size of 6 is that great for calculating an average as one high performer or one low performer will affect it

Data is here if you don’t want to use the headline rate (but AIUI, the headline relates to the last 12 months anyway).

https://www.ons.gov.uk/economy/inflationandpriceindices

I would increase leave allowance to reward long service rather than increase in pay.

The only flaw I see is that you’re obliged to make at least inflation based increases every year, which is very good of you – but with inflation currently coming from external forces (exchange rate issues) rather than increased GDP you’re potentially liable for large increases in salary irrespective of performance or company performance – looking at a worst case scenario you might find yourself in a few years looking at a 5% inflation matching increase in a tough market.

Gotta agree ….
I think it’s a great sentiment but tying yourself to inflation seems very risky and if you can’t afford it one year then it will be a bit of a mess (and I’m guessing exactly not what you want to do) trying to explain why you need to let some people go to pay for the remaining people’s mandatory pay rise…

I would increase leave allowance to reward long service rather than increase in pay.

We already do that

The only flaw I see is that you’re obliged to make at least inflation based increases every year

See above – we were also going to factor in company performance too – so if we aren’t making money then there would be a negative impact on the resultant figure.

Our financial position (for example Below expectations -1%; As expected 0%; Above expectations +1%)

I absolutely would not publish this to staff.

I have no idea what our pay rises are based on, but they seem to be “about” inflation each year.

Bonuses are paid if the company has made a profit. I would be wary of tying wages to profits, what if you have a lean year?

As long as its clear there is no contractual obligation to give inflation based rises then I see no issue with that.

I absolutely would not publish this to staff.

Why not? We want to be transparent. If we say to Employee A ‘you got £500’ and to Employee B ‘you got £1000’ then they talk, Employee A would want to know how we got to that conclusion. We are clear with people in their Appraisals if they have not performed (which thankfully is not often) so surely this makes the whole calculation more fair and transparent?

Surely salary rises are nothing to do with the inflation rate? It’s to do with whether you’re making a profit.

If it was 1977 with 20% inflation would you still think this was a good idea?

Last time I worked somewhere that had a formalized system, there was a pot of money which got divvied up based on things like performance. If the pot was small, we all got less. If large, more.

Surely salary rises are nothing to do with the inflation rate? It’s to do with whether you’re making a profit.

But we would want people to be getting at least inflationary increases if they perform as expected.

If it was 1977 with 20% inflation would you still think this was a good idea?

Good point, put we would also factor in company performance in the calculation (see above) – although I am going to include a statement saying this is a framework for calculations and we are not bound by it legally.

You should never get to an appraisal and have a below expectations or target. You as a manager should be having discussions and agreeing fixes with your employees.

Even with that in place you should be questioning the managers or employees suitability long before a negative pay rise is enacted.

Why not?

I think it’s setting you up for issues down the line, and also sets the tone that there will be a pay rise every year (assuming there is inflation).

Employee A would want to know how we got to that conclusion

We’re not allowed to discuss salary etc (it’s in the contract). But all you have to say is, “it’s based on company performance, your performance and inflation”.

If you’re saying “this is the framework but we may or may not stick to it at our discretion” then that’s ok I guess. I don’t know of any company that publishes their pay rise calculations though.

I’ve always thought paying people their age in years with three 000’s on the end was the best method.

More sensibly I dont wage has anything to do with inflation or profit, you pay the going rate for a skill?

I don’t know of any company that publishes their pay rise calculations though.

We wouldn’t publish them to everyone – we would just show each individual their own.

More sensibly I dont wage has anything to do with inflation or profit, you pay the going rate for a skill?

Well yes when they first stat at the company – but after years 1, 2, 3 etc – do you just say ‘that’s the going rate – it’s gone down so we are reducing your salary?

Well I’d just like to say that is bloody briliant to make sure staff at the very least get more than inflation. Sir I applaude you.

Aye that pisses all over our year on year pay cut.

Well done boss

I think you pay a percentage based on performance, not have a default increase for inflation allows that percentage to in effect be negative or flat or above inflation.

I would also take into account how they are in relation to the going rate for their role.

Many places I’ve worked have the performance element as a multiplier against a set %age figure, which in your case could be inflation, rather than an addition. So, say 0.5 (or 0) for underperformance, 1 for meeting targets and 1.5 for exceeding.

That way, people who ‘just’ do the job (and I know that csn be exploited) get an increase of the inflation rate, which seems fair as they’re getting paid the same in real terms to do the same job the following year. People who go above and beyond get a duly awarded with an above inflation rise, and dossers get an effective pay cut (which, again, seems fair).

IHN – in essence that is what I believe I am trying to achieve but slightly differently to your experience.

I have tweaked as such:

Annual inflation (currently 2.3%)
based on the current Bank of England figures at time of calculation

Our financial position
Very well below expectations -3%; Well below expectations -2%; Below expectations -1%; As expected 0%; Above expectations +1; Well above expectations +2%; Exceptional +3%)

Employee performance
Very well below average -3%; Well below average -2%; Below average -1%; Average 0%; Above average +1%; Well above average +2%; Exceptional +3%)

[DELETE]Time in position (to encourage staff loyalty ie, 1% per year after 4 years continuous employment)
We already reward time in position with additional days holiday so we shouldn’t be giving a double reward

Bonus/Promotion/Other discretionary increase
This would be added after the initial calculation (ie, we wouldn’t calculate it with the pay rise already applied)

(Employee A – Earns £20,000 + [Inflation 2.3%] + [Financial position 0%] + [Performance -1%] = 1.3% increase – £460 p.a. salary increase = £20,260) + Bonus/Promotion/Other discretionary increase [£0] = £20,260

(Employee B – Earns £20,000 + [Inflation 2.3%] + [Financial position 0%] + [Performance +3%] = 5.3% increase – £1,060 p.a. salary increase = £21,060) + Bonus/Promotion/Other discretionary increase [£940.00] = £22,000

No harm in having a defined process, but would also echo that someone doing the same job adequately year after year should be getting inflation linked rise – so next year he’s still getting the same in real terms.

Performance related pay should be as a one off, and again you can define that calc as you see fit.

In companies I’ve worked for it has usually been based on a three way multiplier

1/ Company performance – if the company does well, we all benefit. Company does badly, we all suffer. Range = 75-125%

2/ Divisional performance. Same idea but in a smaller team – eg: how did the Pharma BU do, vs the Agchem BU, etc. Range = 75-125%

3/ individual performance – which is agreed against objectives. Range = 50-150%

In my last company then your annual bonus was fixed based on position – so people who allegedly had the most influence on the business also had the bigger bonus even as a % of salary.

eg: a role might have a defined ‘on target’ bonus of 10%

If the company, division and you all hit target, your bonus was then 10%

But say the company had a stinker (so 75%), the division had a stinker (so 75%) and you were a nob all year (so 50%) then you’d get 2.8% (0.75×0.75×0.5×10)

If everything was amazing (man) you’d get 1.25×1.25×1.5×10 = 23%

It didn’t replace pay rises for promotions, or discretionary ones for new skills, but also had the benefit that you had to be there the whole year to get it.

In your system, two issues are 1/ performance related pay is then paid every year, even if you don’t repeat that level (so, be excellent one year, and continue to get rewarded every year even if you’re just ‘adequate’) 2/ cutting pay is hard (even if it is for not performing), and cutting pay because of an economic downturn or company mistake or whatever even harder. Causes resentment, makes people look elsewhere. Not paying (as high) a bonus is far more acceptable.