36, How does the salary increment process work
The salary increment process is not an arbitrary activity. It is a structured decision that begins with understanding how much an organisation can afford to spend on its overall payroll. Payroll here does not only mean fixed salary but also includes bonuses and incentives that the organisation plans to pay.
Starting with the Increment Budget
The first step in any salary increment process is to determine the total budget available. This budget is usually linked to the organisation’s profitability, revenue, or, in some cases, the level of investment the organisation has received if it has not yet become profitable.
Once the total budget is identified, the organisation then needs to decide how this budget will be distributed across employees in a structured and justifiable manner.
Linking Increment to Performance
Most organisations today follow a pay‑for‑performance philosophy. This means that salary increments are not uniform across employees but are differentiated based on performance levels.
A common approach is to identify a benchmark increment percentage for an average performer. Employees performing above this level receive higher increments, while those performing below this level receive lower or, in some cases, no increments at all.
Using Rating‑Based Matrices
Many organisations use performance rating scales, such as three‑point or five‑point scales, to decide increment percentages. These matrices may differ across departments, roles, and designations.
For example, a production department may have a different increment structure compared to a support function such as HR or finance. This differentiation is a management decision and is usually aligned with the organisation’s reward and performance philosophy.
Critical Roles and Differential Treatment
In some organisations, certain roles or departments are considered critical or niche. These roles may not fit into the standard increment matrix and may have a separate increment structure altogether.
Such differentiation is typically driven by market demand, revenue impact, or the strategic importance of the role to the organisation.
Market Alignment and Salary Benchmarking
Another important input into the increment process is understanding market trends. Organisations often conduct salary benchmarking exercises to understand how their pay levels compare with the external market.
In addition to formal benchmarking studies, recruitment teams also provide informal market insights based on interactions with candidates throughout the year. This combined understanding helps organisations decide whether they want to position themselves above, at, or below market levels.
The Real Objective of Salary Increments
The primary objective of a salary increment is not to adjust for inflation. It is also not merely to retain employees. The core purpose of an increment is to motivate employees to continue contributing to the organisation.
Salary increments are also one of the strongest tools available to reward or penalise performance. When designed well, the increment process reinforces desired behaviours and performance outcomes across the organisation.
Related Podcast Episode
https://www.youtube.com/embed/DIxrmhnI79Y?si=GKZMwqsonrDs0Lh2
This article is based on the transcript of the original podcast of the same name featured in India HR Guide.
The transcript has been translated into this article with the support of AI and a human‑in‑the‑loop process.
