As we head towards the end of the financial year, many firms assess staff performance and internally discuss and debate pay rises. Meanwhile, employees begin to position themselves for the end of financial year pay rise or bonus.

Research from recruitment company Hudson indicates that nearly 68 percent of employers increased base salaries by 2 to 4 percent last year, roughly in line with the inflation rate, and 94 per cent of employers expect to give pay increases this year, either across the board or to high performers.

However, this is a tricky process – the employer’s fair pay rise might be an employee’s ‘peanuts’. Moreover, each employee will value financial and non-financial rewards in their own unique way.

Employees tend to perceive pay rises according to internal indicators, such as the ratio of their contribution to what they receive, and how that ratio compares to employees doing comparable work.

Employers tend to look at external positions and benchmarks when reaching a decision, including market pay rates and macroeconomic factors affecting the broader economy.

According to Livingstone’s senior consultant Joshua Shingles, quoted in The Australian, underpayment is a false economy, leading to employee insecurity and a loss of key staff. Higher-performing staff are often more likely to leave due to market demand and can be expensive to replace.

Overpayment as a general organizational culture can lead to complacency and reduce capacity to acquire necessary additional human capital from outside.

Employers should look at employee value rather than cost, and tie employees’ efforts to organisational measures of performance.

Non-monetary rewards and practices around organisational culture, work experience, workplace flexibility and promotions prospects, can be equally desirable for some employees as monetary rewards.

IHR advises that well-established policies and procedures minimize business and legal risks. A robust, equitable performance review system understood by management and employees is crucial in this respect.