Q&A: Calculating General Pay Increases Based on Midpoint

This Q&A provides answers to some of the most common questions HR Services has received regarding the process and reasoning for calculating general pay increases (GPI) based on midpoint.

Questions and Answers

Q: What is the goal of pay increases?

A: Pay increases are given to employees to recognize and reward continued service to the organization. Pay increases also are necessary to keep pace with cost of living and to remain competitive in the job market.

In the private sector, a pay increase typically is used to reward individual performance and is based on a percentage of an employee’s salary. If an employee is a strong performer, they can expect a higher pay increase. In contrast, school districts use a market-based approach to pay increases that aims to reward service.

Q: What is a general pay increase?

A: A general pay increase (GPI) typically defines that equal increases are given to all employees “across-the-board.” Most edu­cational entities award general pay increases for continued service.

A GPI is the recommended method for providing pay increases to all employees.

Q: How is a general pay increase calculated?

A: General pay increases for employees on pay ranges are calculated by applying the percent increase approved to either the midpoint rate of the pay range or to the employee’s current pay rate. Best practice is to apply the pay increase to the midpoint of the pay range. Using the midpoint as the basis for pay increase calculation ensures employees in the same pay grade will receive the same rate of increase, unless the employee’s pay is close to or exceeds the maximum of the pay range.

Pay increases for jobs on salary schedules (e.g., educators) can be calculated by applying the percent increase ap­proved by the board each year to the midpoint of the salary schedule or market rate. Using the market rate as the basis for calculating pay increas­es is the preferred method because it most closely matches the method of pay increase for employees on pay ranges, and educator pay structures that spread pay by experience don’t have a midpoint aligned to market.

For non-educator job groups, midpoints for each pay grade should be aligned with market average value for jobs in that grade, so basing the increase on midpoint is akin to calculating the increase as a per­centage of market value.

Q: How does offering a general pay increase based on midpoint affect salary relationships?

A: Pay rates are set for employees at the time of hire to ensure there is separation of pay for differences in experience and skills. When midpoint-based pay increases are offered, this helps maintain the same distance between employee pay and achieve internal equity. Offering an increase based on current salary would change the internal pay relationships and could lead to internal pay inequities.

Q: How does offering a GPI as a percent of midpoint compare to an increase based on an individual’s salary?

A: The example below provides an example of offering a GPI as a percent of midpoint compared to salary. In this example, Suzy and Joe are both in pay grade 4 with set minimum, midpoint, and maximum values.

In the example, a 3 percent increase based on employee salary gives Suzy an increase of a higher value than that of Joe, even though they are being rewarded for the same year of service. Additionally, the spread between their pay increases from $13,000 to $13,390. Over time, if increases are based on salary, the pay difference or spread between employees in the same or similar job becomes greater leading to internal pay inequity.

By granting 3 percent of midpoint, both employees are rewarded equally for the same year of service, while also preserving the amount of pay spread between the two employees based on the difference in their experience and skills at time of hire.

Q: How does a general pay increase impact a market-based pay system?

A: The goal of a market-based pay system is to pay employees within a defined range of the market rate for a specific job. The objective is to get employee pay close to the midpoint (market rate). Offering an increase based on the midpoint improves advancement of lower paid employees through the range to the midpoint, while also slowing the advancement of those above midpoint. This strategy of pay maintains the integrity of a market-based pay system by controlling the spread of pay around the midpoint and prevents overpayment or underpayment for jobs based on job responsibilities and market value.

Q: How do I help my employees understand pay increases?

A: Organizations use a variety of methods to communicate with staff about annual pay increases. Some entities use total compensation statements, either sent directly to employees or posted in an employee online portal; others use more passive methods, such as posting the increase information on their website.

Regardless of what method the organization chooses, communi­cation from the employer to employees about pay increases should include the following details:

• Dollar amount or the percentage of pay increase
• Basis for pay increase (midpoint, actual salary)
• Effective date of increase (e.g., the first duty day for the current school year)
• Paycheck in which the employee can expect to see the increase

Strategic timing of communication on approved pay increases is essential. Early communication could reduce costly employee turnover and aid in retention efforts.

It is also important to be transparent in communications. Transparency in compensation is open sharing of informa­tion about an employee’s pay, including placement on a pay range, annual increases in pay, and adjustments due to job reclassifications. Transparency results from good communication and fosters trust in the process. Trust leads to a better work environment for employees. Being honest about the compensation plan and its management results in higher retention rates and can support recruitment efforts.