Will GE Get Rid of the Annual Raise?

Will GE Get Rid of the Annual Raise?

Executives at General Electric “are reviewing whether annual updates to compensation are the best response to the achievements and needs of employees,” Jeff Green and Rick Clough report at Bloomberg:

The company may also scrap the longstanding and much-imitated system of rating staff on a five-point scale. Decisions on both issues may come within the next several months, spokeswoman Valerie Van den Keybus said by phone.

“We uncovered an opportunity to improve the way we reward people for their contributions,” Janice Semper, GE’s head of executive development, said in an e-mailed response to questions. She said it will involve “being flexible and re-thinking how we define rewards, acknowledging that employees and managers are already thinking beyond annual compensation in this space.”

In the upper reaches of the U.S. labor market, a broader shift in benefits is already under way. … Ending annual raises hasn’t played much part in the conversation — yet. When GE considers something like that, “other companies will do it too,” said Ranjay Gulati, a professor at Harvard Business School.

If GE is setting a trend in reconsidering annual raises, it’s following one when it comes to performance ratings, which many large organizations have reformed or done away with of late, often as part of a broader rethink of annual reviews. Last week, Morgan Stanley announced that it was replacing its five-point performance rating scale with a list of adjectives, not long after its rival Goldman Sachs discarded its nine-point evaluation system and adopted a system of more continuous feedback.

While GE’s management ideas are often emulated elsewhere, Green and Clough note that “across the corporate world, few practices command such broad assent as the annual raise”:

Only 1.2 percent of U.S. companies use a discretionary timescale for increasing base pay, according to this year’s compensation survey by Mercer LLC. About 90 percent of companies have a fixed date when everyone receives their raise, assuming one is granted, while about 5 percent make the change for each employee on the anniversary of their hiring or move to their current job.

So if GE does opt against annual raises, and if others follow suit, this would represent a significant cultural change.