Mohammad Anwar is President and CEO of Softway and co-author of the Wall Street Journal Bestseller “Love as a Business Strategy.”
In today’s job market, where the highest-performing workers can have another opportunity lined up by Friday afternoon, employers need all the help they can get to retain their best talent.
After all, when employees decide to leave, the price hurts. It often costs “between six and nine months of that employee’s salary” to recruit and train a replacement. That figure swells to twice the salary for senior and technical positions.
If your company is like most, you’ve probably relied on the go-to practice for delivering incentives: the annual raise. Annual raises predictably increase salaries, but these widely spaced pay bumps often do little more than convince reluctant employees to stick around for another year. They don’t encourage great performance.
I’ve witnessed how employees tend to compete with one another with increased intensity as the decision point for annual raises draws near. However, once raises are given, employees often feel discouraged to continue at the same higher performance level as there is no recognition. Someone passed over for a raise may not feel appreciated, which can drive them to look outside for work instead.
What if I told you there’s a better way to deliver pay increases that not only retains talent but also incentivizes high performance year-round? It’s a system of periodic pay increases called spot raises, and it might be the edge your company needs to stop attrition in this competitive workers’ market.
Timing Is Everything When It Comes To Pay
Perhaps the most significant difference between annual raises and spot raises is the impact of timing. Instead of giving a yearly raise, awarding frequent or multiple raises for higher performance, even if the individual raises are small, boosts morale and encourages individuals to perform at an even higher level.
Consider that rewards have the greatest impact when given in a timely manner. As the adage goes, “You should pay the laborer before the sweat dries off their brow.”
Yet, with annual raises, your employees see a reward for their good performance only once a year. A disconnect forms between the effort employees put in and the benefit they experience. When performance reviews and subsequent raises lie months away, employees might not feel recognized or valued enough to do their best work.
On the other hand, spot raises allow for rewards and achievements to be celebrated in real time, not once a year after many achievements may have been forgotten. An employee who was tempted to job hop is more likely to stay when they know they will be recognized and rewarded in congruence with their performance.
The Current System Fails To Inspire Employees
The problem with annual raises and their attached performance management systems is that they aren’t designed to improve performance.
Far from being inspiring, these ranked systems are more often used as a tool for salary compression. A competitive annual system pits employees against one another as they compete for raises, which can drive bad behavior and contribute to toxic work culture.
Employers generally aren’t eager to give raises; rather, they’re looking for excuses to take them away. It’s a system steeped in what I call unforgiveness—the grievances and mistakes recalled during performance reviews that are used to compress salaries.
Picture an employee sitting across from their boss and hearing, “I want to give you a raise this year, but a few months ago, you made that mistake …”
The employee might walk away from the meeting with a raise, albeit a smaller one than they expected. However, they’ll likely be discouraged after hearing criticism for a slip-up that happened months earlier—perhaps discouraged enough to send out their resume to other establishments.
Employees Succeed With Continuous Support
By using a system that involves frequent check-ins, you can deliver praise and constructive criticism, reinforced by a tangible pay increase, as it occurs rather than bundling a year’s worth of negatives all at once.
The most effective reward systems offer continuous feedback, coaching, education, exposure, advocacy and sponsorship, all of which are powerful performance improvers. When you incorporate these actions with a spot-raise system, pay becomes a visible and transparent factor in true performance management. Employees won’t be left wondering for months if they’ll get a raise this year; they’ll know continuously where they stand.
To be clear, no system, including spot raises, is free from bias. You’ll still want to watch out for favoritism and other subjective influences, which can erode trust within your organization. Spot raises also won’t fix a toxic culture. Good behavior and treatment at every level of the organization are still foundational to success. However, by combining a healthy company culture with spot raises and making space for frequent and ongoing dialogue, you can build trust with employees, reward your highest performers and support your workers who may need help.
Rethink Your Reward System
With how difficult it can be to replace employees in today’s job market, preventing attrition is likely one of your top priorities.
Any organization can amortize their annual raise budget over 12 months to change the frequency with which they distribute raises. In a spot-raise system, the organizational budget stays the same, but a higher-performing employee receives more and a lower-performing employee receives less, which is more equitable.
Equitable spot raises given periodically—as frequently as every month—go a long way toward making salary increases more motivating, meaningful and timely for your employees.
The reactions I’ve seen within my own company have been phenomenal. Moved to tears, employees have said that the recognition is far more important to them than the raise itself. It wasn’t only a raise they received—we made the moment a celebration of their achievements.
Morale and motivation soar when employees feel like you’ve noticed and appreciated their hard work, and it reflects in their future performance.
By shifting to a spot-raise system, you can build a feedback loop of performance improvement and a workforce of people who feel heard, valued and inspired to do better—people who are happy to stay with your company for a long time.