The Most Common Labor Budget Blunder

By James Truhlar

The Most Common Labor Budget Blunder

This is a gaffe that I have seen hundreds of times by banks and credit unions that are self-deceived in thinking they are paying for performance. Typically, a decision is made that there will be a 3% labor budget increase for the following year. Most employees are given a 2% salary increase and better performers receive a 3% salary increase. What is wrong with this?

If the average market rate movement is 2% (and it is this year), and the average employee receives a 2% salary increase, the result is that employees hired at pay levels closer to the minimum because they are newer in the role, will never reach their midpoint. This methodology is a sure way to become the training ground for your competition. Once this happens 3 years in a row, your non exempt employees are thoroughly trained, have received 9% in increases, and the market has moved 6%; your competition will gladly hire them away for the midpoint while you are paying them only 3% above the minimum. You will have to pay the midpoint to recruit someone with the same amount of experience unless you are fine with always having inexperienced employees with training needs.

Additionally, differentiating performance by 1% is the same is as saying “Knock yourself out, overachievers, it is worth a hefty 1% difference from what an average performer will receive.” Nothing about this process sends the type of message that excellent performance is valued. The wrong message is sent to both your high performers and your needs–improvement-but -isn’t-bad-enough-to-fire performers.

Below is our recommended budget matrix for non-exempt salary increase calculations. It will eliminate wage compression, differentiate for better performance by 2% and move the pay levels of satisfactorily performing employees to the midpoint in 3 years, assuming they are hired in with no experience at around 85% of their midpoint.

< 91% 91% – 96.9% 97% – 103% (Market Midpoint) 103.% – 110% > 110%
Outstanding 9.0% 6.5% 4.0% 3.5% 3.0%
Exceeds Expectation 8.0% 5.5% 3.0% 2.5% 2.0%
Meets Expectation 7.0% 4.5% 2.0% 1.75% 1.50%
Needs Improvement 0.0 0.0 0.0 0.0 0.0
Unacceptable 0.0 0.0 0.0 0.0 0.0

Below is the recommended matrix, designed to get satisfactorily performing exempt and executive employees to the midpoint in 5 years.

< 91% 91% – 96.9% 97% – 103% (Market Midpoint) 103.% – 110% > 110%
Outstanding 7.0% 5.5% 4.0% 3.5% 3.0%
Exceeds Expectation 6.0% 4.5% 3.0% 2.5% 2.0%
Meets Expectation 5.0% 3.5% 2.0% 1.75% 1.5%
Needs Improvement 0.0 0.0 0.0 0.0 0.0
Unacceptable 0.0 0.0 0.0 0.0 0.0

Communication during on-boarding would be necessary so as to avoid setting expectations of continued higher-than-market salary increases once the midpoint is achieved. After an employees’ pay level is at the midpoint, typically only better performance would yield a larger-than-market-rate salary increase.


Back to Blog