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While many companies have caps regarding how much an employee’s salary can be increased at once, others do not. Companies with caps will often have a documented or undocumented but understood policy that promotions, at most, come with a 15% increase from your prior salary, or that any raise cannot exceed 10%. This sounds like a good way to put some controls in place that protect the company from unpredictably high growth rates of personnel costs. I’ve got news: it doesn’t. However, it does accomplish 4 other things—but they aren’t good:
It makes personnel salaries unpredictable because you plan to fill a role at a certain price but that price is set by industry standards, not by your promotion policies. If you fill the role with an internal candidate at a significantly lower rate than industry standards—just because you can—it throws your spending plans out of whack.
It makes personnel salaries inconsistent which is bad for morale. Employees talk about salaries. Senior roles have access to budgets. Salaries are not secrets. Don’t be surprised when resentment builds up.
It favors external candidates over internal ones. So much for loyalty meaning something. It feels like a betrayal to employees who have worked for your cause for a long time when someone who has given your company nothing is valued at a higher rate.
It makes your company gain a reputation of paying employees the lowest in the industry. Glassdoor and other sites expose companies’ personnel spending practices which can easily turn off the best candidates from seeking employment on your team.
Let me offer a scenario to demonstrate how this plays out. You are hiring for a Program Director role. Industry standards set this salary range at $80k-90k. If you hire an external candidate, you’ll probably offer them $80k and anticipate some negotiations while you plan not to exceed $90k. Let’s say your current Program Manager—who makes $60k—is excellent and goes for a promotion into the Program Director role. Sounds good. Except that your company policy that caps promotions at 15% increases, leaves you offering your loyal employee a new salary of $69k. At first, you think this is great—you’ve saved the company $11k-21k in filling the role. But that savings comes at a cost to your accounting team’s sanity, employee morale and your company’s reputation and ability to attract the best talent.