How to Tackle Merit Increases When Part of Your Workforce Is Maxed Out

Your organization had an exceptional year, but the merit increases you’ve calculated would push several employees over the defined maximum of their salary ranges.

What can — or should — you do? Bump up their salaries anyway, exceeding those workers’ range (a situation known as red-circling)? Tell them, “Sorry, you’re out of luck,” and freeze their pay?

“Every role will top out somewhere,” said Ken McLean, a senior compensation analyst at Newport News, Va.-based Jefferson Lab, a U.S. Department of Energy Office of Science national research facility. “That’s hard for some people to understand. They may think, ‘I’m good at what I do,’ but if you don’t want to make a leap into management and you’re not doing anything different, every position has a topping-out point.”

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When this occurs, managers are faced with a dilemma. They may go the salary-freeze route and explain to employees there’s nowhere else to move within the existing scale. But employees hearing this message may become discouraged and less engaged, or begin to seek out opportunities elsewhere.

With that as the backdrop, here are several other avenues to consider.

Exceed the Salary Cap

In certain circumstances, an employer may choose to essentially ignore the defined max or make an exception to keep a valued employee, providing a worker with a base pay increase that exceeds their salary cap and creating a red-circling scenario.

But while red-circling is an option, it’s usually not preferable, McLean said.

“Why do you have a maximum then if you’re going to blow past it?” he said. “If you’re red-circling the employee and going over the max of the range, you call into question your whole comp system right from the get-go. If you’re not going to follow the max, who’s to say that you’ll pay anyone at the minimum of the salary range? I’d be very cautious with going that way.”

Offer a Lump Sum Bonus

A popular solution is to provide a lump-sum bonus in the amount of the merit increase that would have otherwise been added to a worker’s base salary.

A lump sum may be paid out all at once at the start of the year, benefiting the employee if they end up leaving their role before the year is out, McLean said.

Or, for that same reason, an employer may choose to provide a lump sum in several installments throughout the year, noted Megan Nail, CCP, a vice president in the total rewards practice at risk management and benefits advisory firm NFP.

Extend Other Cash Incentives

Other short-term incentives could help fill the gap as well, including spot bonuses, retention bonuses, profit-sharing, opportunities for commissions, or rewards based on individual projects, goals or targets.

That said, Nail advised that the construct of the reward program needs to be consistent. “If you’re talking about spot bonuses or project bonuses, even if those are something you consider more for individuals at the max of their range, they should be equally available to everyone to maintain equity in that program,” he explained. “The same is true with flexible schedules or project opportunities.”

Leverage Benefits or Perks

If cash incentives or promotions aren’t on the table, consider extending more flexibility or paid time off to a maxed-out employee, or emphasizing the merits of a positive corporate culture as a retention incentive. However, McLean cautioned, benefits are personal, carrying different value to each employee — and corporate culture only goes so far.

“If you offer a great place to work with flexibility and people who are good to work with, you can lean into that, but if somebody sticks at the top of their range for too long, a great environment is only going to hold them for a bit,” he said. “If money is important to that person, they’ll leave in a year or two, in all likelihood.”

Explore a Role Change, Promotion or Career Development

An employee at the top of their scale may have earned, or may be ready for, a promotion or other role change. This generally reopens the door for a merit increase by moving the worker into a higher pay scale, and making this switch with a qualified employee could be beneficial for the organization — if the circumstances are right.

“Career development, advancement or promotions are great, but only if the person wants it,” Nail said. “I’ve seen cases where a person is topping out in their range, and a company tries to create another role for them that really doesn’t make sense. Either they don’t want it or the work isn’t substantially different enough to justify it.”

Extending opportunities for career development through training, mentorship, or the chance to lead projects or participate in cross-functional teams also could be a useful move, if those opportunities are clearly tied to the possibility of a future promotion and salary increase.

In those cases, a transparent conversation between employee and manager about the worker’s career path is vital, Nail said. You’re not offering them extra work in lieu of a raise — you’re outlining and paving a clear path for the employee to expand their skills or take on more leadership because doing so will open doors for future salary increases in your organization.

Overall? Be Honest — and Check Your Work

Open communication is key when you’re determining how to handle compensation at the max of a worker’s range while seeking to retain employees — and keep them engaged. Explain to workers the position you’re in with current salary maximums, where the market is, and the difference between paying for cost of living and cost of labor, McLean said.

Discuss employees’ goals and priorities with them ahead of time, so that when it comes time to make a decision to avoid red-circling, the manager is armed with relevant information to make the best choice for each individual worker. Is flexibility or additional time off more important to one employee than a certain pay bump? Are they interested in a promotion eventually — or definitely not?

“A promotion or different role, rather than a lump-sum bonus or added flexibility, might be the right answer in one case based on the needs of the department and the skills of the individual,” Nail said. “I don’t think it has to be the same every time, but there has to be an internal third party in HR or comp looking at these decisions across the big picture to make sure there are no wild discrepancies or anything that could be perceived as favoritism.”

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