A Lousy Raise

I just spoke with our Finance Director, who indicates that, due to our company's subpar performance (of note: we conducted a 10% company-wide RIF in July '07), our typical 4-5% annual increases will either be
(a) zilch;
(b) 1.5 - 2.5%; or
(c) option "b" plus the possibility of 1-2% more based on company performance when September '08 rolls around.

To complicate matters, our pay increase formula typically includes comparison with market data (some are at market, some are below) and scores from performance appraisals. Any of the options presented by the FD throw our formula out the window, thereby ticking off employees who have (a) spent a significant amount of time on self-appraisals, multi-rater appraisals, appraisals with managers, etc. (I can hear it now -- "what's the point of appraisals?!"); and (b) know they are below market rate.

I have highly recommended that, if at all financially possible, we go with any option that is not "zero,", knowing that, regardless, our staff of approximately 40 individuals will be upset and further demoralized by the news because they have been working hard throughout the last six months to get our numbers up.

My question to you is this: In our small, close-knit environment, how do we best manage employee expectations for increases given the reality of the situation? *I* know that no raises or minimal raises are reasonable given our company's financial situation (I'd rather have a job than give everyone the raises they "deserve"), but we've had some other major internal morale issues lately (top managers started a shadow organization and left last fiscal year to compete against us -- it's ugly), and I can see this situation inciting employees to either (a) stay and quit, or (b) leave and cause all the issues that turnover in a small company creates. Another note: we are in a niche market that's difficult to recruit for. Additionally, we have approx. 65-70% of staff who have been with the company 5+ years.

Thank you, Evil HR Lady! I appreciate your kind consideration and assistance!

I feel your pain. You've lost a bunch of managers, you've laid off 10% of your workforce, and now you have to tell the remaining group that their raises will stink. Fun!

Your company is small--40 people. They should ALL be aware of the situation already. In fact, with a company that small, every one of them should be able to have a direct effect on the financial success of the company.

What is going on to improve the financial success of the company? Have the Finance Director, CEO, and head of HR (I'm guessing that's you) met with everyone and taken their suggestions?

I guess I see this more as a business failure than as a need to spin things to make employees feel like they are getting a good raise when they are not. There may be a fundamental disconnect with understanding where the money comes from in a business. "I've worked hard, I deserve a raise." But, your work has not been successful for the company.

Yes, that will go over great.

What I would do is publicly tie compensation to performance--with the understanding that with increased COMPANY performance people could do much, much, better than the 4-5% they've received in years past. Long term incentives, such as stock, can really help the company in this situation.

Because the company is so small, and people should be able to see the results of their work, I would recommend stock options or another profit sharing plan, in conjunction with performance evaluations and whatever raises the company can afford.

The CEO may freak out (it's MY company and that cuts into MY profits), but there won't be any profits if the workforce is disgruntled or gone to a competitor. Keep in mind, as well, that it's more expensive to recruit new hires than it is to keep the current ones happy. If you can't afford a 4% raise now, how are you going to afford to recruit, hire (at market rate) and train new employees?

This is not to say you need to give the higher raise, just that without giving employees a reason to work for the company's long term success, you'll be in that boat.

I don't envy your situation. But, it's reality. And the good news is, if your people are paying attention to the news, they'll think that the economy is just about to crash into a recession, the likes of which have not been seen since the great depression. So, give them some gruel in the company cafeteria and tell them to like it! (Just kidding.)

As usual, I am betting my brilliant readers will have other suggestions to make your life happier.