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Why So Many Employers Are Getting Rid of Raises

When work is overwhelmingly frustrating, sometimes the only thing your brain can comprehend is a daydream about what you’d do if you had money to burn. Unfortunately, your odds of being the next lottery winner are low. But that annual pay raise is still in play, right? Maybe you could use that money to buy a boat or backpack through Europe like you’ve always wanted.

Well, don’t hold your breath. Kiplinger data predicts pay raises will hardly surpass yearly inflation rates in 2017, let alone provide any semblance of a monetary cushion. Hardworking employees can expect a 3% pay increase in 2017. Some high-performing employees could see increases between 4.5% to 5%, while low performers might see increases of 0.7% to 1% on average, according to Kiplinger.

Although the projected raises are nothing to write home about, many Americans will take what they can get. But it seems companies are doing away with pay raises for their employees. Why? Because annual pay raises don’t work. Research shows they’re both ineffective and costly — an undoubtedly bad combination for any budget-conscious organization. Read on for some of the biggest reasons why pay raises might become a thing of the past.

1. Pay raises hardly encourage loyalty

Man writing a check

Man writing a check Pay raises often aren’t high enough to promote loyalty. | iStock.com/Devrim_PINAR

The Chicago Tribune suggests a “salary increase serves two purposes: to motivate workers and to keep employees from leaving for a better-paying job. In its current form, the traditional raise does neither of those things very well.” Employers are lucky when pay adjustments amount to 1% to 2% above inflation each year, which doesn’t go very far — or do anything to encourage behavior changes when necessary. Workers have found the best way to score a significant pay raise is to move to a new company or get a promotion.

The Wall Street Journal cites a University of Toronto study, which found at least a 10% raise is needed to change morale, temporarily at least — and that’s something organizations just can’t afford. Increasingly competitive industries are forcing companies to rethink how to keep people around if they want to remain relevant.

Next: But pay increases don’t always equal money.

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