Employees aren’t satisfied or motivated. Managers hate the work and the communication. And HR knows it doesn’t solve the problems it should.

So why do we do it?

This is a question we’ve been asking ourselves at Commvault, not because we know we want to change it but because we see the imperfections in the model. We’ve been challenging ourselves to think bigger and out of the box to determine if there is a better way. We’ve debated, we’ve researched, and we’ve proposed innovative ideas to push our thinking.

The answer still eludes us as of this writing, but there are some tidbits and findings worth sharing.

Let’s begin with the end in mind

Ultimately, salary management programs should be focused on optimizing the following, given resources and constraints.

Of course there are effects between these variables – satisfaction has been shown to drive likelihood to stay, and larger increases tend to be both more satisfying and more motivating. Ultimately budget limits might inhibit the ability to meet these goals, and the desire for pay equity might require sub-optimizing satisfaction/retention/motivation for some. But as we look to build something better, this should be our goal.

A recent study shed some interesting light on whether the typical annual salary review is able to accomplish these goals and how we might explore solutions. A paper published in Human Resource Management in early 2016 focused on the “smallest meaningful pay increase (SMPI) – more on that shortly. As part of the research in this paper, the authors publish a survey employee participants in two different annual pay review processes. In both surveys, only 15% of employees were motivated to work harder based on the salary change, and the one study noting satisfaction showed that two-thirds of employees described being “crushed, disappointed, or indiffererent” toward their increase (the other third were “pleased” and no one was “ecstatic” – even the three people getting a >21% raise).

While these are only two surveys, I believe the results are indicative of what we’d see in most organizations. Expectations are often just met (if at all) and rarely exceeded.

The same research paper found that it takes about a 5% raise to get people over the hump from indifferent to pleased and to get someone to work a little harder. That’s a sobering finding when most annual salary budgets hover at 3%.

So what can we do? Focus on fairness.

Payscale recently published and analysis stemming from its salary survey, and noted the impact of pay process sentiment on overall satisfaction and intent to stay. They noted that process fairness is 5x more important than pay vs market in driving satisfaction, and nearly 2x as important than pay vs market in driving intent to stay.

The recent WorldatWork Journal (2017 Q3) included an article about pay-for-performance systems, and it noted fairness (or justice, in their words) comes in four forms:

  • Distributive – is the outcome fair?
  • Procedural – are the rules and process transparent, unbiased, consistent, and accurate?
  • Interpersonal – do the bosses treat me well?
  • Informational – did the boss share information me with fairly?

Of these four forms of fairness, Payscale and the authors would argue that procedural fairness matters the most in terms of satisfaction and motivation. When people feel like they understand the process and believe in its consistency, they are more satisfied with the outcome and this will have lasting effects on job performance.

Do we need an annual focal pay review to drive procedural fairness?

Among the most consistent feedback I’ve heard since my last post (about changing the compensation function) is that the need for managing pay equity requires us to continue with some traditional practices, like annual pay review processes and traditional benchmarking. I’m not sure I buy that. A common focal review doesn’t ensure any more transparency or fairness – and in fact the volume of the process might inhibit a manager and HR’s ability to follow a consistent process for each employee.

The space is ripe for innovation – when so many stakeholders are dissatisfied, it’s clear that some change is needed.