Workplace Reality #4: Promotions and Bonuses reflect market conditions, not capabilities, mostly

This post is part of the series on 9 Realities of Modern Workplace.

In this post, we talk about Reality #4: “Promotions and bonuses are determined more by available budget and market conditions, less by your capabilities or your performance“.

Compensation Planning

An organization exists for the primary purpose of maximizing shareholder value. This means that what the organization pays to its employees depend on 2 conditions:

  1. Organization’s ability to pay, this year and subsequent years – this depends on profitability and other factors.
  2. Market price – this depends on how much other companies pay for the talent you need

Annual (financial) plan for a company decides the amount of money (usually as a percentage of their revenue) allocated for bonuses and salary hikes, based on these 2 factors, usually picking the minimum of these 2 numbers.

Compensation Logic

Once this amount is decided, say 3% of revenue, this money is supposed to be distributed among the employees, using some reasonable logic. Here are 2 tricky situations that companies navigate when applying their logic:

  1. When giving bonus and raise as a percentage of existing salary, those who are already paid more, will get more (but % wise it may feel less to them). A 3% raise of a senior guy can be equivalent to 20% raise for a junior one. Organizations then try to decide whether to make a junior guy very happy or a senior guy just a little more satisfied.
  2. When bonus and raise are made contingent upon performance rating, Reality #3 can hit you. If performance review process doesn’t generate good and fair rating, this can result in seemingly unfair bonuses and raises.

Most organizations apply both these logic (one portion of money is allocated to #1, another to #2). In addition, given that organizations value extrinsic motivators so much, motivational factors are incorporated when designing this logic (“Everyone will get raise proportional to performance rating, except when they are attrition risk, in which case we give an attrition-risk-linked portion of raise to avoid that risk“).

Implications of Compensation Planning and Logic

Here are some unexpected outcomes from compensation planning and logic:

Outcome Reason
Everyone worked very hard this year and expected a good raise, but the raise was extremely low Company’s revenues were down and so condition #1 above (organization’s ability to pay) became the driving condition
You worked regular hours, no pressures, you thought year was very light on work, and the raise for that year was exceptionally good Market had lots of demand for talent of your time and so condition #2 above (market price) became the driving condition
You are a senior manager doing very well in the company, and are expecting a good hike this year but you get only 4%, much less than your expectation of 15% A few junior employees in your division were attrition risk and company decided to give them a hefty raise, which meant not enough money for your raise %, since your base salary is so high
You are a junior developer and expect a substantial raise because you did very well last year, but got just the regular 15% One of the senior managers had to be placated with a high raise and that didn’t leave enough money on the table.
Your performance rating is very high this year and you expect a very high raise. Doesn’t happen. Total allocation for raises this time was very low so your individual raise was low too.

Dealing with the Reality

It is very hard for most people to deal with this reality – this impacts money they get, and it skews all of our judgment about the workplace. However, the best way to deal with the reality is to understand how these numbers are derived for your organization (if you sincerely try to understand the process in your org by asking around, you will get good information), and give the company the benefit of doubt: this is a very complex challenge and they are trying to do the best they can (in most cases).

Good thing is that over a period of time (say 2-3 review cycles), many of the issues mentioned above will average out – so you may get very poor raise one time though you worked hard, but you may get a much better raise and a promotion, without doing anything extra in next review cycle. If they don’t average out (or are not heading towards it), and you don’t see any reason why you shouldn’t be getting more than you do (based on market conditions and your company’s financial conditions), this may become a fairness question that you need to deal with – maybe your manager or your org is not being fair with you. Till then, you should spend your energy in making yourself more valuable in the industry and more learned so that companies crave for your skills and abilities.

In the next post, we will discuss the Reality #5: “There is always a stack ranking and a bell curve of performance rating, even in companies that claim they don’t have these“. Stay tuned.


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