I have spent 30 years working to make compensation fair. One thing has become clear. Fairness is far more complicated than a flat percentage.
Every year, businesses set a salary increase budget. In my experience, it’s usually 3 to 4%. It feels consistent. It feels manageable. It feels fair because everyone receives the same percentage and the business feels better about the budget.

The math tells a different story. An employee earning $22 per hour receives a 3% increase of roughly $1,373 per year. It is about $26 more per week before taxes. It barely covers the increase in their grocery bill. An employee earning $100,000 receives a $3,000 increase. It is the same percentage. It has a very different impact on someone’s life.

So, is performance based pay the answer? In theory it is. In practice it often breaks down.

This type of compensation requires clear goals set in advance, managers who are trained to evaluate consistently, and leaders who set realistic targets.

Throughout my career I have seen all three fail in ways that were avoidable.

I have seen bonus programs built on targets that employees could never reach. Employees worked hard. The goals were not designed to be met. Trust disappeared. I have seen discretionary bonuses awarded for reasons unrelated to performance. When those decisions come to light, the impact on morale is significant and lasting.

These are the realities HR navigates every year and usually under tight timelines.

So, what do I recommend?

Consider separating cost of living from merit. A baseline increase acknowledges inflation and protects purchasing power. A separate merit pool can then be targeted at employees who are below the midpoint of their salary band. This creates a more defensible and equitable structure than subjective ratings alone.

Ensure performance goals are realistic and set collaboratively. Goals that employees cannot reach do not motivate. They demoralize.

Separate compensation conversations. Market adjustments, merit increases, and bonuses serve different purposes. When they are combined into one annual conversation, the intent behind each decision becomes unclear.

Strengthen manager capability. Even the best compensation program fails without managers who can evaluate performance consistently and communicate decisions clearly.

Compensation will never be perfect. It can be more thoughtful, more transparent, and far fairer than a flat percentage applied the same way to everyone.

For those who work in compensation, I welcome your perspective on how you have approached these challenges.

If you are a small or mid size business rethinking compensation, I offer a free 20 minute HR assessment. Book here.