How to link appraisals to increments

Start with the budget

Management fixes the increment budget before ratings are final, usually as a percentage of the current monthly payroll. In a worked example, a Vadodara engineering firm's quality department has a monthly payroll of ₹20,00,000 and an increment budget of 8 percent, which is ₹1,60,000 a month in total increments for the department. Every individual increment must fit inside that figure. Setting the budget first stops ratings being adjusted afterwards to fit the money, which is the most common way the link between performance and pay breaks.

Build a merit matrix

Rows are ratings; columns show where the person's pay sits against the midpoint of their grade's pay band, measured by compa-ratio: current pay divided by the band midpoint. People below the midpoint get a larger percentage for the same rating, which gradually corrects underpayment. The example matrix below uses three columns: compa-ratio below 0.95, from 0.95 to 1.05, and above 1.05. The percentages are the company's own design choice and must be tested against the budget.

• Rating 5: 14, 12 and 9 percent
• Rating 4: 10, 8 and 6 percent
• Rating 3: 7, 5 and 3 percent
• Rating 2: 2, 0 and 0 percent
• Rating 1: no increment, and an improvement plan instead

Worked example: one employee's increment

Anil is a quality engineer on a monthly gross of ₹40,000 in a grade whose band midpoint is ₹45,000. His compa-ratio is 40,000 divided by 45,000, which is 0.89, rounded to two decimals, so he falls in the first column. His calibrated rating is 4, so his increment is 10 percent: ₹4,000 a month, taking his gross to ₹44,000 from 1 April. The increment is processed in June, so April and May are owed as arrears: 2 months times ₹4,000, or ₹8,000, paid as an arrears earning in the June payroll.

Before issuing the letter, check the new structure. Under the Code on Wages, basic pay plus dearness allowance must be at least half of total remuneration, so an increment added entirely to special allowance can push the structure out of line. Split the increase across components so the rule still holds; see the 50 percent wage rule.

Communicating increments

The manager explains the increment after the rating conversation, in a short meeting or call, followed by a letter with the new monthly gross, annual CTC and effective date. Explain the link: your rating was 4 and your pay sits below the band midpoint, so you received the higher end of the range. Do not discuss other employees' increments. Give employees rated 2 a clear view of what would move them to 3 next year.

• Deciding increments first and adjusting ratings to match
• The same percentage for everyone, which makes ratings meaningless
• Ignoring position in the band, so underpaid good performers stay underpaid
• No rule for mid-year joiners, such as a pro rata increment
• Paying late without planning the arrears

Step by step

1. Fix the increment budget. Agree the total increment budget as a percentage of current payroll with management before ratings are finalized, and split it by department.
2. Define bands and midpoints. Make sure every grade has a pay band with a minimum, midpoint and maximum, so compa-ratio can be calculated for each person.
3. Build and test the merit matrix. Set percentages by rating and band position, then test the matrix on last year's ratings to check it fits the budget.
4. Take the final calibrated ratings. Use ratings only after calibration. In ZeniaHR, ratings come from the review cycle's shared rating scale.
5. Calculate each increment. Work out compa-ratio, read the matrix, calculate the new monthly gross, and total the department to check it against the budget.
6. Review exceptions. Handle promotions, retention cases and people at the band maximum separately, with written approval for each.
7. Update salary and structure. Record the salary revision on each employee's record. In ZeniaHR, the salary structure is built from the monthly gross and split into Basic, DA, HRA and Special by company percentages or salary components.
8. Pay arrears if the increment is late. Calculate months owed times the monthly increase. In ZeniaHR, add the amount as an arrears earning in that month's payroll inputs.
9. Issue increment letters. Send letters with the new monthly gross, CTC and effective date after the manager's conversation, and file them in employee records.

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