Sustainable Profits

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On an almost weekly basis, someone on my team of employees walks into my office and asks for a raise. It doesn’t seem to matter that we have a clearly communicated policy, and the question often comes with the same assertion — these employees believe they are worth more to the organization than they are being paid. Or perhaps, these employees point out, they work in one of the company’s more profitable business units. The list of potential reasons is quite long.

As an employer of more than 100 people, I find dealing with the question of raises a constant challenge, one fraught with more negatives than positives. And yet, it’s an inevitable issue that crosses my desk constantly. While I can understand why employees would like to make more money, I also have other issues to consider. The challenge I face is reconciling the objective value a job creates for the organization with the subjective value of the individual filling that job.

At TerraCycle, in 2012, we allocated $250,000 for raises on a total payroll of $5 million. In the hope of creating a coherent policy, we formed a compensation committee, consisting of five senior employees, to help figure out how to divide up the money we allocated.

The group decided to give about half of the money to cover the rising cost of living, basically to adjust for inflation. As a guideline, we turned to the Bureau of Labor Statistics, which releases (typically in September) annual inflation numbers to calculate each year’s cost-of-living adjustment. In 2012, it was 3.6 percent, and this year it is projected to be around 1.5 percent. The committee decided to give everyone who had been with TerraCycle for more than 12 months a 5 percent raise, which is of course greater than the cost of living adjustment. The rest of the money was used for “adjustment raises,” for those whose jobs had grown beyond the roles originally envisioned.

Even though we believed we had a well thought out and fair process, no one came to me to thank me for a raise. Instead, about half a dozen people complained that they thought they should have gotten more. I empathize with my team, even those who complained, because it’s not easy to grapple with one’s own value to an organization. Here are some excerpts from a letter I wrote to one such person in an effort to explain how raises work at our organization and how employees can elevate their roles to command higher salaries.

The reason for our decision (made by the compensation subcommittee) to not give you a discretionary raise, was that when we look at discretionary raises we consciously try not to look at the person but the job itself. In other words, what is the role you perform worth to our company? The answer for TerraCycle, for your specific role, is what we are currently paying you plus 5 percent  …

You also raise a good point that you have been here for many years and that you should be rewarded for your longstanding service. The reward for such length of service is not raising the pay beyond what the job is worth. Instead, the time invested in a job is rewarded with increased job security …

This leaves one last important question: How can you rise beyond the financial constraints of your current role? The answer is to make your role more than what it is today. For example, if one day you start managing a team of people (which I hope will be the case soon), then you will deserve a substantial discretionary raise as you’ll then be taking on much more responsibility and thus be in a higher value role for TerraCycle.

At TerraCycle, which is a fast-growing company, the people who have received substantial raises, moving from making $30,000 to more than three times that per year in a relatively short period of time, are those who not only did great work but took on significantly more responsibility and as such performed a function that was worth more to the organization.

How does your company handle raises?

Tom Szaky is the chief executive of TerraCycle, which is based in Trenton.

Article source: http://boss.blogs.nytimes.com/2013/01/28/trying-to-answer-the-inevitable-question-can-i-have-a-raise/?partner=rss&emc=rss