Fundamentals of Human Resource Management 6th Edition by Raymond Noe, John Hollenbeck, Barry Gerhart,Patrick Wright

Exercise 22

Getting the Most from a Limited Compensation Budget
You want to reward good performance, but there's hardly any money in the budget for raises and bonuses. That's the situation facing many HR managers in today's business climate. Here are some suggestions for making the most of whatever you can spend:
• Make sure that merit pay is truly related to performance gains. Raises are expensive and widely used, so high-performing employees expect to earn significantly more than average. Therefore, it is essential to be sure that performance measures used as the basis for raises are tied to business success and that the organization measures performance accurately.
• Offer modest but frequent incentives as quick rewards for accomplishments. An unexpected $100 one-time award for delighting a customer can have more impact than a $100 per month raise, at a lower cost.
• Implement other strategies to reward performance that can also serve as employee incentives, such as flexible schedules, interesting and unique projects, and formal recognition. These are particularly useful for companies that don't have large budgets to provide meaningful year-end or spot bonuses.
• If the organization cannot afford to give everyone-or even all the above-average performers-a raise, it should target pay increases to the best of the best. Explain that merit pay is for doing something exceptional, not just performing one's job. When expressed clearly, this message actually can strengthen employees' understanding of the connection between performance and incentive pay.
• Set and communicate clear, measurable targets for earning incentive pay. Employees want to understand what they have to do to be eligible for a raise or bonus. They also appreciate knowing the size of the incentive they are eligible to earn.
• Accept that employees who do not achieve the requirements for earning incentive pay may leave. If the system is working properly, the employees who leave should be the ones who contribute the least. If good performers also are leaving, make sure the organization is providing employees with the resources they need -including training and empowerment-for meeting performance targets.
Suppose a manager has enough money to give one employee a 4% raise and another employee no raise, or else the manager can give both employees a 2% raise. What would you recommend to the manager, and why