What are common options for merit increases when an employee is paid the maximum in his or her salary range?

There are several reasons that an employee’s pay may reach the maximum of the employee’s salary rage or even rise above his or her pay range. For example:

• A high performer receives large merit increases.
• A long-term employee stays in the same job.
• An employee is hired higher in the salary range.
• An employee is relocated to a lower-paying region with no adjustment in salary.
• An employee receives a demotion or transfer to a lower-paying position with no adjustment in pay.

When an employer runs across these anomalies, it needs to establish a strategy for how to handle these employees during merit increase time.

Give an increase

Some employers will still want to provide a pay increase even if it is just a small cost-of-living increase. But an increase beyond the established salary range for the job grade seems to be counterintuitive to a company’s compensation plan (why have salary ranges if the employer is not going to attempt to stay within them?). Additionally, increasing a maxed-out employee’s pay will only perpetuate the issue as it will take even longer for the salary ranges to catch up to the employee’s new rate of pay. A pay rate that is above the maximum of the range assigned is called a “red-circle rate.” It is rare that an employee staying in his or her current job is increased beyond the established salary ranges. Red-circle rates are usually attained only via a relocation, demotion or transfer to a salary range below the employee’s current rate, and the employer decides not to reduce the employee’s current rate of pay.

Freeze employees’ salary

Employers often freeze the salary of an employee who reaches the salary range maximum for his or her job until the salary range is adjusted or the employee is promoted to a higher job grade. Salary ranges should be reviewed every year or two and may be adjusted due to cost-of-living adjustments or changes in market data. An indefinite salary freeze can certainly affect the morale of an employee; therefore, employers should consider what else can be offered to the employee to minimize this impact.

Give a lump sum bonus

In place of a base salary increase, some employers may provide employees with a bonus that is roughly the amount of what their merit increase would have been. This bonus may satisfy the employees’ need for additional pay and recognition for their performance without increasing their base pay relative to the salary range.

Provide additional paid time off

Another option is to provide additional paid-time-off days in place of a salary increase. Employers can provide the paid time off (PTO) as a one-time award rather than increase the employee’s yearly vacation balance beyond the company policy. The amount of PTO provided may be tied to the employee’s level of performance or to the amount of merit increase he or she would have received. Employers should consider what seems reasonable within the scope of the employee’s position and current PTO benefits. Anything an organization provides now may set a precedence for how employees will expect the employer to handle similar situations in the future.

No matter what the plan, organizations should clearly communicate what the company is and is not able to do for each affected employee and why.