One of the touchiest issues you will face as a business leader is compensation. Employees have their view on how much they should be paid and what the criteria are for figuring that out, and you have yours. When all is well and the stars are in alignment, those two views are the same. The other 99.9999999997% of the time, you have the potential for conflict and bruised egos, and the best way to deal with that is to be consistent and be honest.

First, consistency. Once you have your criteria for pay, you need to stick to them. The number one reason some employees think they deserve more pay is “because I want more money,” and you need to avoid feeding into that attitude. If an employee is doing the job they were hired to do — no more, no less — and they are bringing the value to the firm that you expected them to bring, then what is the justification for a raise? For them to be paid more, shouldn’t they be doing more? Whether it is bringing in more business, completing more projects, or taking on more responsibility, they should be doing more in order to be earning more. If you start handing out raises “just because,” you will set a precedent from which you will have trouble getting away.

Note that we are not talking about cost of living increases here. An annual raise to account for inflation is important, and should be the same percentage for everyone. What we are talking about instead is following standards for performance-based pay.

By “consistency,” we do not mean paying everyone the same. When it comes to initial salaries, it makes sense to pay people with the same qualifications the same amount of money, but once they are working for you, their pay should reflect their true value to the firm, not simply how full their resume was when they started, or how long they have been with you. If your employees know you are paying attention to the objectives you set for them and using them to determine salaries, they will be more likely to pay attention to them too. So be sure to follow whatever guidelines you set, and do not just pay them lip service while actually rewarding employees based on who whines the most.

When it comes to setting those guidelines, make sure they reflect what your organization needs from this employee, and be honest in your assessment. Do not shortchange the credit you give them just so you can try to save a few bucks, as the good employees will see through that and resent it (and rightfully so). Most people will not object to being held to a reasonable standard for compensation purposes, but they will not put up with meeting those standards and then being told they didn’t. Work with your employees as you set their objectives, and while you may do salary reviews only annually (frankly, it helps your budgeting if you only change salaries once a year), do not limit yourself to once-a-year performance reviews. Give them an opportunity to improve before the salary review hits by giving them feedback throughout the year. If an employee requests a salary review out-of-cycle, consider making a deal with them: based on your review, their salary could go up…but it could also go down. This could limit the number of out-of-cycle reviews you do, and it reinforces the importance of the standards to which you have both agreed.

Setting performance standards for employees’ pay can be tricky. You may want to reward innovation and risk-taking and the ability to turn that into revenue, but you do not want to encourage behavior that simply meets metrics without increasing the employee’s true value to the firm. So, look at paying them based on the number of projects they complete successfully rather than on the number of hours they work (because the latter encourages them to simply stretch out a project, and will ultimately reduce revenue because they complete fewer projects). Reward them based on the amount of repeat business they bring in from clients, but don’t count “fixing mistakes” as repeat business. Pay them more for taking classes and developing new talents, but only if those talents contribute to the work they do. Employees’ objectives will often need to be qualitative in nature, which will be tricky to measure, so find a fair way to do the measurements and be sure everyone understands what they are and recognizes their validity, and ensure the evaluation process is transparent.

The idea of paying employees based on the value, and possibly not giving annual raises, may seem crazy in Asia, where many employers are concerned about losing people and worry that their employees will go somewhere else for even a small increase in salary. But there are other factors you should consider when you think about retention:
 

Your talented employees who create the most value will be the ones getting raises — and those are the ones whom you want to keep.

 

Employees who cannot perform well or who seem unmotivated to add value will not be getting raises and may choose to leave. Good.

 

There is more to retention that just pay. Talented people want to work with other talented people. If your compensation strategy drives people to higher performance, that has the added benefit of creating an environment where good people want to work.

 
You have a goal of minimizing costs. Your employees have a goal of maximizing their income. Somewhere in the middle you have to meet. If you can reduce the conflict over this most painful of issues, you will have a far better working relationship with (and within) your team.