Salary increases and incentives are a key business issue for any organisation and sit close to the hearts of the people working for any organisation. The incentive & salary increment process is often not designed to support the organisation’s strategy or objectives, but rather is run as an ad hoc and disjointed process periodically throughout the year. The process typically does not support a well-articulated remuneration strategy that is derived directly from the organisational strategy.
A workers performance not only depends on the pay level they receive (Solow, 1979, in Alexopoulos & Cohen, 2003), but also takes into consideration their pay compared to workers above and below them, those within the same group, and the external labour market (Akerlof and Yellen, 1990). Pfeffer (2005) argues wage compression, the act of reducing the size of the pay differences among employees, improves productivity.
An analysis of a company’s pay practice often highlights discrepancies and inconsistencies between staff, as well as a poor correlation to market benchmarks. With resources limited each year, it is difficult to address these discrepancies, to really reward top performance and to improve the “fit” to targeted pay lines. The absence of a disciplined approach to applying these resources year after year in a consistent manner perpetuates the problem.