Most organizations allocate a percentage of the current payroll to each department for merit increases. For example, a merit pool may be 3.0% of a department’s payroll.  Thus, increases greater than 3.0% must be offset by lesser amounts for others.

Manager A said to me, “For my absolute best producers, I recommend 3.5% based on a 3.0% pool.  Marginal contributors get 2.5%, but most everyone’s increase hovers around 3.0%.”  

“Why do you use this approach?” I asked.

“I want to keep my team happy.  If I give too much to my stars, others complain.”

By contrast, Manager B said, “I recommend a 6% to 7% increase for my stars. I may recommend 2% for my average producers and 0% for a marginal performer, but I take care of my top performers.”

“Do you get complaints?” I asked.

“Yes, but the complaints come from team members who produce less.  I don’t want to base financial rewards on whether average or low performers complain.”

TalentGuard, a training company, reports that it takes $250,000 to $500,000 to replace talented producers.  Star performers, according to studies, create four times the value of average employees.  Recommendation: Pay your top performers.