Now is the time many organizations start thinking about the next year’s pay raises. Before you start the hunt for ‘market rates’, projected pay raise averages (overall 3.1% for 2105), budget or other data – think a bit about what you are paying for.

Very few founders, CEOs, or senior executives have thought about their philosophy of compensation directly. Fewer still have tied it to their desired culture.  And so, over the decades, I have talked about these issues with many senior folks.

Often I also use a short quiz and set up scenarios like this:

You have two people in the same role, both are equally productive.

And I ask a series of questions about how one would calculate the pay raise for each. One question is: John comes in early and stays late every day, he works many long hours each week. Tom works his regular schedule but rarely puts in extra time unless helping others.

And nearly 3/4 say that they would give John a larger raise.

Do you see the issue? Most do not until I ask why they are rewarding the person who cannot get their work done in a timely manner over the one who does. Remember – the conditions were that both were equally productive. So Tom is doing the same amount and quality of work in less time than John.

As you think about your salary planning for next year, here are some questions to ask yourself. Pick the top three in each and rank order those.

1. Do we want to compensate for:

  • individual productivity
  • teamwork
  • cost of living changes
  • our financial success
  • increased productivity
  • market pricing changes
  • seniority
  • clients increase
  • revenue growth (funding growth for non-profits)

Think, for example, how many organizations say that they value teamwork highly. How many actually base pay on that? Very few.

2. Will an individual be rewarded with a base salary increase for:

  • meeting performance standards
  • skills increase
  • job size
  • growth in performance
  • short-term projects
  • long-term achievements
  • cross-training
  • breadth of work
  • mentoring/training others
  • patents, publications, or public presentations which enhance your company reputation

Those carry different meanings to your employees. Which represent the culture you say you want? Which do you actually do?

Now you can think how you would pay people based on those decisions. These are only a few of the considerations that underlie effective compensation decisions. Sometimes, you may want help in thinking through these issues. Talk with your management team, a mastermind group, or call me.

You need to think carefully to ensure that what you say about your culture and values is reflected in how you pay people. Sure, you want a simple system. And one that is easy to understand and to explain so employees value it. But you also need it to do what you expect or you are wasting money.

Adapted from Compensation, Culture, and Pay previously published on