Most large corporations in the United States provide their hourly employees with annual pay increases by calculating an increase pool based on a percentage of their total payroll, and then equally distribute these funds to each employee in the form of a fixed amount or percentage of pay, regardless of an individual’s performance. The purpose of this article is for us to recognize the impact of this long-standing practice and consider alternative methods of distribution that would provide increased motivation for all employees and help improve company performance.

Message to High Performers (“Slow Down”)

First, let’s consider the impact of an across-the-board increase on those employees who excel at their jobs and consistently put forth extra efforts. When these employees realize that their above-and-beyond efforts yield no more pay recognition then those marginal efforts expended by other employees, they are often demotivated or resentful. As one hourly employee put it, “Why should I break my back and go the extra mile every day, when the guy next to me gives half the effort and gets the same amount of pay increase?”

Message to Marginal Performers (“No Need to Work Harder”)

Next, let’s examine the message that an equal distribution of pay increase sends to the marginal performer. It simply reinforces the idea that there is no need to excel or put forth extra effort because their current, limited performance yields the same financial results as achieved by those employees who are working much harder. In short, these employees see no need to change or improve their performance.

Promoting Mediocrity and Employee Turnover

As the two examples above illustrate, funds that are equally distributed to all employees, regardless of performance, can actually have a deflating effect on high performers and reinforce the company’s acceptance of marginal performers. The impact of this dynamic is certainly not lost on the majority of employees who perform at an average or above average level. Even for this group, the recognition that high performance yields no more financial reward than those performing poorly provides no financial incentive for them to aspire to a higher level.

The irony of this situation is that the additional monies expended by companies to reward employees — sometimes in the millions — can actually have a detrimental effect, sending an unintended message that minimal or marginal effort is acceptable.

Alternatively, basing at least some portion of the annual increase on individual performance would help to remind employees that performance is both recognized and rewarded. In addition, as we have long recognized, the best performing employees are also the most marketable. At a time when talented labor is increasingly hard to secure, providing talented and high-performing employees with some additional motivation and recognition can prove to be very helpful in retaining their services.

Why Companies Don’t Consider Individual Performance

There are several explanations as to why companies do not base pay increases on individual performance. The most common of these include: (1)

  1. Stipulation by union contract
  2. Inability to accurately rate individual performance
  3. The simplicity of administration
  4. Inertia – “that’s just the way it’s always been done”

Simply put, providing an across-the-board increase to all employees is just easier and represents the path of least resistance. Alternatively, providing some measure of recognition for individual performance would benefit all parties, including the unions, as underperforming operations are typically the first to be closed or consolidated, resulting in the loss of jobs.

It should be noted that the author recognizes that cost-of-living increases provided to hourly employees can be distributed equally, as they are driven by inflation and not performance of the individual.

New Strategies and Alternatives for Pay Distribution

There are many different ways for companies to distribute their annual pay increase pool in order to recognize individual performance. In some cases, the entire pool can be discretionary, and in others, a portion of the pool can be discretionary. The latter example can help ensure that all employees receive some minimal increase, while still providing a portion of the pool to be distributed based on performance. As stated above, this approach can help to reinforce positive behaviors for strong contributors, while helping marginal performers understand that additional effort will be required if they are to receive additional pay.

We Can Help

When it comes to determing the best method for distributing pay increases to recognize effort and reinforce hard work, turn to the professional employee relations consultants at Hutchison Group. Schedule your free consultation today! 

For over 30 years, our team of labor relations consultants has had the privilege of working with many of the world’s best companies, helping them design and implement innovative and effective merit based compensation and reward programs. For a complete list of our clients and services please visit our web page at