Even more difficult than the 1 million dollar question, the “4%” question ….

4% as in the “default “ number picked by a majority of companies in the last few years when deciding upon the annual salary review budget. 4% as in: 3.5 merit and .5 promotion, or 3 merit and 1 promo and adjustment, or any variations thereof. The fact is, absent a major gap to market issue or exceptional economic duress, 4 % was as good as a number as anything else. With the controlled inflation of the last 10 years, this budget was enough (OK, almost) to help companies develop and strengthen their pay for performance policies and practices.

Then came the financial crisis, and the gas price hike and most recent relative fall, and the fear of recession, and suddenly, 4% does not look like the answer anymore, or does it ?

I hear a lot about companies pondering between 4% and 0%, only to opt for a difficult to explain- difficult to manage 2% budget. I hear compensation professional exhaling sighs of relief that their budget was approved before the crisis  and others, happy that they do not process anything before April, leaving them ample time, so they think, to see what the market is doing. And I also see the agony of the companies with a focal in December, or November, who have to make recommendations to their CEOs. The risks are burning cash and jeopardizing the future with a 4% budget if a recession is indeed confirmed, or losing all your talents to the competition if you go for 0 and the others still go for the magic number (4). The risk can even be greater: paralyzed by the fear of recession, you cut the budget, thus creating the condition of your own demise, by reducing the purchasing power of your employees and therefore fueling the recession…

As always, the resources for your answer are probably right there in your company: is your product more or less sensitive to short term market evolution? Do you have a strong sustained need for talent because of what is in your development pipeline? Is your company cash rich or poor? How difficult is it to recruit your talent? Who are you competing with? How is the state of your employee engagement?

One thing is sure “4%” is not the answer anymore, but “5 minus 2 plus 1 %” might be just what the doctor ordered….