How Do You Decide the Right Percentage for Employee Yearly Increments?

I would be very thankful if anybody can suggest a basis for deciding "the basis of yearly increment" for an employee. In short, how do I justify what should be the most appropriate method of deciding a certain percentage of increment.

Regards,
Dhirender Singh

The percentage of increment depends on various factors. The important ones are the payable capacity, increase in the cost of living, talent availability, percentage across the similar industry, market trend, performance of the company, and individual.

These factors are general, and you must also take care of critical people and departments. In general, the management will declare the budget, and based on the amount available, a plan will be formulated accordingly. It is essential to involve all Heads of Departments in finalizing the percentage of increment for departments and individuals; otherwise, they may simply shift the blame to HR.

Regards,
Kamesh

I agree with Kamesh. First of all, you have to specify the range of increment that you can provide for this year. The factors which should be considered while specifying the range are organizational performance and market trends.

Increment Slabs Based on Performance Ratings

Further, you can make increment slabs based upon the overall performance rating of employees. For example, a 12%-15% increment is decided for the current year.

[Ratings] [Hike to be provided]
4-5: 14% - 15%
3-4: 13% - 14%
2-3: 12% - 13%
Less than 2: no hike, but rigorous performance improvement plans need to be prepared.

Performance Management and Increment Decisions

For performances lower than 85%, we need to intervene as soon as possible and not wait until the end of the year. We should arrange training for them so that they can perform the job they were hired for. Sometimes, training is not feasible. If everything fails, let them go.

For good performers, first consider external equity (how much others are paying in the same sector or perhaps a different sector but with the same skill set, sometimes even in different locations but with the same skill set - "global equity"), inflation, the company's financial position, overall growth plans, succession plans, etc.