According to Aon Hewitt's Annual Salary Increase Survey, companies across the board are planning to dole out 14.3 per cent salary hikes to high performers. Though another survey by Towers Watson shows that companies plan to give double-digit growth, 80 per cent of the companies surveyed said a large portion of their allocation towards salary increase would go to high performers. Is it right on part of the companies to award salary hikes only to high performers? Wouldn't it have an impact on the morale of the rest of the workforce?

Let us look at this issue from a very fundamental perspective. Why do corporations compensate its employees? The very question has an answer embedded in it – To compensate for the services rendered. If the purpose is to compensate for the services, the next question is how much to compensate? Again the answer is obvious – to begin with, at the market value so that we can hire the people for the needed services. This means companies determine the compensation based on market value to begin with and its capacity to pay. If all this is true, if a corporation pays market- based compensation to each role holder, then there should be no issues. Periodic reviews and revisions are made to this compensation to adjust itself to the changing market realities and the changing capacity to pay. This ensures that employees get paid market value based on the roles they perform and not on their capabilities and aspirations.

Apart from all the above, compensation is also one of the motivators and the incentive for good performance hence differential increases are given for different performance levels. Variable pay plans are also designed as incentives for excellent performance. This obviously is very motivating and satisfying to those who perform beyond the expected performance levels.

If we don’t give differentiated salary hikes to employees based on the performance, how do you expect to motivate the top talent? What is the justification to give salary hikes to those who do not perform at the expected levels? If poor performers don’t like the idea of not getting the salary hikes, they should start performing and come up to the expectations of the management. They also have an option to quit and offer their services to those corporations who are likely to meet their expectations.

Business will reward only those who excel. In the process if the morale of such poor performers goes down, so be it. In any case, they are dragging the performance of the corporation down. Employers have to become choosey on whom to reward and whom not to reward. Pay hikes and the rewards are not entitlements – They are dependent on the organization’s capacity to pay and also leadership judgment. Any corporation has a limited budget for compensation and hence this has to be distributed judiciously.

Employees have to appreciate that increased pay is always associated with value creation, improved productivity and performance that meets and exceeds management’s expectations. What we need is a fair, transparent and well communicated process for salary increases, variable pay programs and the performance management.