Considering the economy, our organization simply cannot afford to provide employees the normal annual merit increase i.e. 2 or 3%. Our management team has been debating the proper course of action here, with some advocating the need to offer a small amount, averaging 1-1.5%, while others nothing at all. I defer to the group on most occasions, although with the uncertainty of 2010, I'm personally in the camp of offering a 0% increase and generating employee motivation in other ways. Can you offer any insight here? I should also note, we did experience a small-scale layoff during the 2nd quarter this year.
Your question is both timely and unfortunately quite common, as organizations large and small continue to struggle with the "raise" issue. As you mentioned, our recession has squeezed profits and constrained budgets to the point where many companies are reducing headcount, as well as many other employee programs, without even entertaining the idea of merits.
I've recently spoken with a former colleague, residing at the executive level in a large, global business. This past November, their merit pool allowance for all departments was 1.5%. As a leader (and subordinate himself), he was obviously frustrated by the allowance, and felt it would be almost impossible to find the proper dialogue in which to communicate this message. "With this amount, why give anything at all?" His other point being that if someone did deserve a 3%, someone else would receive nothing, which was only feasible if a terribly poor performer resided on the team.
Another theory is to offer everyone the same merit, say 2.0% across-the-board. I would personally steer clear of this approach, as it eludes union mentality and does very little to motivate your stronger performers. Across the board increases have always been and will continue to be de-motivators. Most organizations who favor this approach identify with the short-term "fairness" of giving equal raises and rarely acknowledge their long-lasting effects. In general, any merit increase lower than the cost of living will cause strife. Even your lowest level of employee seems to identify with this number and equates the increasing cost of gas and groceries to the number printed on the check. To ease any dissatisfaction with the number given, one idea might be to find a way to lower employee premiums for medical insurance. Can your internal HR team or even Office Manager partner with your health care provider in offering a few new options in 2010 or upon contract expiration? Another simple alternative might be to delay the overall review/increase process. Communicate that you will personally commit to revisiting this process in six months and ensure you do. Delaying the process will give you further time to evaluate the situation and then take the proper course of action.
You had also mentioned your organization experienced a layoff this past year. Do you believe you will encounter a similar scenario in 2010? If you are even uncertain, one way of handling this is to be up front with your employees, sharing that you would rather refrain from providing any increases at this time in hopes of preventing future job loss. My guess is that your employees have some knowledge as to how business has been going and wouldn't be as shocked with this announcement as you might believe. In good economic times, you would never communicate this message! Your employees have obviously witnessed neighbors, relatives and friends losing their jobs and will identify with the fact that the reason they may not receive an increase is to help prevent future layoffs (or at the very least, minimize the number of layoffs if they should occur).
In the end, employees want nothing more than open communication from their employer and in most cases, will respond accordingly. Employees recognize how fortunate they are to be holding a job and generating a paycheck. If you respect the individual they are and share information they need, they should remain loyal to your business.