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Home > Business > Special

What's better? Promotions or pay hike?

BS Strategist | March 14, 2006

Which is a better reward for employees' efforts? The BS Strategist asks some leading HR experts:

Satish Pradhan
Executive Vice President, Group HR, Tata Sons

Salary hikes and promotions are two ways to deal with two different sets of situations. Promotions move people to a higher level, with increased responsibilities and challenges. Of course, salary increments and other benefits also accompany promotions. But promotions are essentially about larger roles.

Therefore, the person's capacity to fulfil larger challenges must be assessed. Opportunities where the person can display his skills also need to be assessed. Salary hikes are a different issue. First, market conditions play a role in salary increments, as the organisation has to live up to prevailing standards. Then, there's the employee's performance in the current role and merit that are rewarded with salary hikes.

Promotions carry designations and other benefits, visible to the outside world. But salaries aren't known to everybody. So promotions are preferred. Employees, too, usually prefer promotions because they want to progress and move up.

Traditional organisations had a rigid grade system with many levels. Today, many organisations are cutting down levels and grades. That's simpler. Earlier, laws and regulations restricted companies from paying their employees beyond a certain limit.

So companies rewarded their employees with promotions. But there weren't too many substantial role differences. It was an illusory growth for people, but that was the only way to reward people and make them progress. The removal of caps on remunerations gave greater freedom to salary hikes.

Performance is a qualifier for promotion. But other criteria like judgement, leadership and so on, are crucial. The boss should observe enough capability in the employee for him to be promoted. And that requires a substantial time period -- certainly more than a year. That's because the employee's performance in the current fiscal year may have a different impact in the following fiscal year.

Sometimes, the person performs excellently before the promotion, but fails to meet expectations after being promoted. This can be very expensive for the company. So it's crucial to judge the person's capabilities accurately. The boss just has to wait and watch carefully.

At more senior levels, an employee's performance needs to be watched for at least two or three fiscal years before getting even a sense of his promotability. Usually, if a person has been performing well for five years, he gets a promotion. That's the single biggest sin!

A promotion has to be about an employee's next job, not his current job. Good performance is only a qualifier for promotions. The main criterion for a promotion should be to ensure the person fits the new role. So, the boss -- who's watching the person to be promoted -- and the boss's judgement, are significant. The boss needs to start including and partnering with the person in his development and growth.

Anita Ramachandran
CEO, Cerebrus Consultants

In a buoyant market most companies grapple with the issue of performance evaluation and its consequences. At one level, managing the performance management process and maintaining a sufficiently high bar of performance in evaluation is critical for a company. On the other hand, the reality of retaining people makes this a challenging task.

Companies often rate the solid citizens in an organisation as "good, but not an excellent" performers and face the reality of the racehorses that have been rated as excellent, leaving nonetheless. Only to find the "solid citizen" also quitting for another job at a good pay hike, making the organisation question the evaluation itself.

So what should companies do in the current market scenario? Should they forget about their performance management system? Should they just hand out promotions and salary increases so that all are appeased? How much should they worry about the attrition issue?

Unfortunately, there are no easy answers to these practical questions. The fact is that companies do need to respond to the reality of the market -- and promotions are always seen to be more valuable in India than money. The importance of designations in a hierarchical society can never be underestimated -- and the need for constant affirmation through promotions is important across all age groups.

In my experience, diluting performance standards through "promotions" just to retain employees always proves to be counterproductive in the long run. Most promotions of this nature are nothing but designation changes that employees, too, can see through.

In the short run, they perhaps serve to appease a few employees, but in the long run they raise more fundamental issues. Over a period of time, indiscriminate promotions result in lack of clarity on accountability and performance expectations at various levels in the organisation.

Certainly, they result in mediocrity at senior levels over a period of time. Of course, several companies do adopt the philosophy of house cleaning periodically to deal with such issues.

Money should, perhaps, be used as a more appropriate means of dealing with the buoyancy of the market. Using more flexible methods of rewards such as a variable pay or a variable allowance would more clearly reflect the market reality of higher salaries, while retaining the sanctity of the other management processes in the organisation.

It is not possible to retain every individual in an organisation -- nor is it required. Retention of individuals in an organisation depends both on their competence and criticality for the organisation. Any compromise needs to be based on a clear evaluation of both these aspects.

Adil Malia
Vice President, HR, Coca-Cola India

Comparing pay with promotion as motivation tools is like comparing chalk and cheese. Pay and promotion are even in theory different concepts having very specific applications. Simply explained, pay is a reward that takes into account the worth of the job and the performance of the individual. A promotion is linked to the higher responsibilities and the potential of the individual.

A pay hike signals that you have done very well on your job in the past year and we want to reward you for your valuable contribution to the company. A promotion is telling you that champ, the company trusts that you can handle higher responsibilities and have the potential to rise within the organisation.

I would like to introduce the broader concept of reward and recognition to the murky waters. In a nutshell, rewards are monetary and recognition is non-monetary. Both motivate. Pay hike is one form of reward. Bonuses, cash spot rewards and so on are the other forms.

Recognition is the pat on the back, and the power of this is not to be underestimated. Where we err is trying to assign the various constituents of this bouquet and promotion to a continuum of importance. Each is distinct and each has its advantages and disadvantages.

Rewarding or promoting an undeserving candidate not only has a negative impact on the business but also serves to demoralise others. A deserving candidate being passed over for promotion or pay hike or getting too little, too late leads to a clear break in the psychological contract. Here, delayed gratification backfires badly.

I ask myself, will a pay hike motivate you? Of course. But this high will soon die down and the long arm of the law of marginal utility will catch up with you. How about a promotion? As a vote of confidence, that means even more than money -- the high lasts a little longer, perhaps. This said, both tools have limited value as motivators if utilised in an ad hoc manner.

James V Abraham
Director, The Boston Consulting Group

Promotions and pay hikes are not rewards. That we consider them as such distracts from their real value in developing and managing talent. Many firms see HR as a set of discrete processes: recruiting, performance-management, rewards and so on.

Instead, HR should be seen as an integrated talent-management system, focused on attracting and developing the right talent. In this system, each process is part of a bigger whole.

Rewards, as part of this system, form the basis for recognising performance and contribution. Simply put, they are a way of saying thanks for the past year. Promotions and pay-hikes, in contrast, should never be about saying thanks for the past year.

Instead, they should recognise potential and respond to take advantage of it. Where rewards are backward-looking into past performance, promotions and pay-hikes should be forward-looking into future responsibilities.

That difference is far from subtle. A pay-scale reflects the market value of what we expect from employees at a given level. In our hyper-growth market, with good talent in high demand, pay-scales are moving ever higher and higher. Pay-hikes move the pay-scale in line with the market. That is it. It should play no other role.

Promotions, in a similar vein, move people into higher levels of responsibility and ask them to play more senior roles. This recognises individual potential and matches it with a firm's strategic need. It continually challenges people, moving them out of their comfort zones, asking them to take up greater responsibilities, demanding greater results, and strengthening the talent pool in the firm. That's it. It should play no other role.

Do promotions and pay-hikes make people happy? Of course. Take that happiness as a nice side-effect. It is a grave mistake to use promotions and pay-hikes just to make people happy. That can have severe consequences. Pay-hikes used as rewards quickly create inequalities, and reinforce performance.

The worse performers settle into worse performance, because after all, the firm expects nothing more from them. And promotions based on performance move people into jobs they are ill-equipped to perform. Just because a person excelled in one position does not mean they will excel in the next.

Instead, bad performers should be moved out, not paid less. People should be moved up if they show aptitude, not history. These are tough decisions. And you've been promoted to take these tough decisions, not avoid them.

J K Mitra
Professor and Placement Convenor, Faculty of Management Studies

Promotions and pay hikes are not really either-or options. In reality, there are at least three options: promotion, that is, designation and responsibility enhancement, with pay hike; promotion without any significant pay-hike; and pay-hike without promotion.

The first option often creates a degree of anxiety in the employee as she has to cope with and justify the new identity afresh. Odd as it may seem, the other two options are less anxiety-provoking.

The true answer for any such question is: "it depends". The choice of options depends on the normative values of the reference group to which the employee relates, the employee's current economic status and future liabilities in the family, the life-cycle stage of the employee and such others.

Other factors also come into play: the feeling of "encouragement" or "discouragement" is also a function of perceived equity and justice; the way the decision was communicated to the employee; and the past reward-history of the employee. Remember, most employees do not get encouraged or discouraged by what they get, but by what others with whom they compare get.

Promotions, pay hikes and so on are core "up-down" or "in-out" identity issues. That is, as a result of the promotion or pay hike, have I gone "up," remained where I was, or have I gone "down"? Am I "in" the centre, or "out" at the periphery? And where are the other actors on the workplace stage?

Most employers have discovered that Asian societies in general, and Indian society in particular, are quite sensitive to hierarchical differences that are often reflected through "titles". Therefore, only pay-hike without a "promotion" would not enhance the status of an individual in the social hierarchy and, therefore, has a limited incentive value.

After all, pay is relatively private information and, therefore, fails to act as a potent cue to evaluate the worth of an individual; whereas a promotion is public information and a more potent parameter in assessing the worth and status of an individual.

When handing out increments and promotions, employers need to be wary of at least two important issues of inequity and instrumentality. Inequity issues emerge when one promotion/pay-hike results into 10 other people feeling betrayed. You may have one "encouraged" person who received the reward, but score of others may be "discouraged" because they feel that they have been denied their legitimate due.

Y V Verma
Vice President, HR, LG Electronics India

Both promotion and pay hikes are measures to reward an employee's worth. They don't really work so well when it comes to preventing the employee from looking around for a job change. Motivation comes neither through pay hikes nor promotions -- they are both hygiene factors. In fact, once an employee gets a higher raise or promotion, it increases her bargaining power.

Pay hike depends on the performance, the company and the level at which the employee is. A 10 to 20 per cent hike in salary makes you happy for, say, two months, but then you take it for granted. The same applies to promotion.

Whether the employees deliver to their optimum depends on the culture of the company. Similarly, attrition has a lot to do with employee empowerment, and the attachment with the company and the people working in it.

Also, what matters more to the employee -- promotion or pay hike -- depends on the level at which she is serving in a company. For young graduates -- engineers, managers and so on -- with three to five years of experience, money is more important. They are also influenced by the brand name and flexi-time.

For the middle-level employee who has work experience of eight to 10 years, empowerment is important, so is the pay package. He also wants a little more freedom when it comes to taking decisions.

On the other hand, when we talk of those employed at the top level with work experience of 20 years or more, a 20 per cent pay hike is not what really matters. What would make a difference to him is recognition and respect from the owner or managing director of the company, being a part of the core group and decision-making bodies of the company, total flexibility and freedom.

The latest trend in the recruitment market is lot of top-level people making a shift to the Indian private sector from multinational companies. They may be compromising their salaries, but what they are probably after is a work culture that is more akin to their own philosophy of life, human values and so on.

As told to Prerna Raturi and Rituparna Chatterjee.

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Number of User Comments: 4

Sub: Very nice article

This is a very nice and enlightening article. Thanks to the Rediff team !! Cheers, Ali.

Posted by Ali

Sub: Pay Hikes (and) Promotions

I think Adil and James have said it all. Pay Hikes have NOT rewards, they are not even a way to say thank you. Its ...

Posted by Mohit Mehra

Sub: Promotion or Pay hike!

Defenitely both are nice and soothing.. As Mr. Pradhan puts it Promotion gives you prestige outside the official soceity also, where as salary hike is ...

Posted by SIBS

Sub: Excellent stuff

The one I liked most is the view of James Abraham from BCG. I agree with him that it is not a reward but the ...

Posted by Niranjan



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