As the economy slowly improves, two issues must be addressed: 1) pay raises and 2) employee retention. The average base pay increase in 2012 is expected to be 3%, up slightly from 2011. However, 3% may not be sufficient to hold your star performers.
The recession masked an underlying problem in our labor force—there are significant labor and skills shortages within certain industry segments and professions. As the market opens up, there will be greater competition for these people and you can expect movement within your workforce—particularly with your star performers.
One way to combat this issue is with pay. As I noted in my book Uncomplicating Management, you cannot treat all employees the same. You must take care of your star employees. That means your best employees should be getting hefty increases (7%-8%), your average employees should get increases in the 3%-4% range and your marginal employees should get 1% or nothing at all.
By rewarding your stars, you ensure that they will remain with you. You also send a clear message to the rest of your workforce that when you perform like a star, we’ll take care of you.