When One Pay Raise a Year Isn't Enough

Some Companies Aim to Keep Top Workers With Frequent Pay Increases, but Practice Can be Risky

By Rachel Feintzeig

July 15, 2014 3:58 p.m. ET

What's better than a raise in July? Another in October. And one more in January.

As companies try to retain top employees and hit growth targets, some are ditching the annual salary review and doling out raises and bonuses several times a year.

The practice can be risky, compensation experts and executives say, since workers who respond well at first could grow unhappy if the rewards slow down. But as the race for top technology talent escalates, bosses at smaller companies say frequent raises are one way to keep engineering talent from leaving for giants such as Google Inc. GOOGL -0.20% and Facebook Inc. FB -1.08%

Executives say it doesn't cost that much to speed up the raise cycle—many companies say they're simply breaking annual raise amounts into smaller bites—and the frequent pay raises keep workers motivated and less likely to jump to competitors.

But the practice isn't widespread: 5% of 1,147 companies increase salaries more than once a year, according to a 2013 survey by consulting firm Aon AON -0.59% Hewitt.

At mom-focused discount site Zulily Inc., ZU -1.38% managers assess the pay of the company's 1,380 employees each quarter, although Chief Executive Darrell Cavens said he'd do it more often if he could.

"It's not an easy exercise," Mr. Cavens said. "If it wasn't a big burden, you'd almost want to work on it on a weekly basis."

Quarterly raises at the Seattle-based retailer range from 2% to upward of 15%; some employees might go 18 months without a raise, while others could notch three raises in a year.

The raises make a lot of extra work for managers, but employees stay focused on the company, since the next payoff is just around the corner, said Mr. Cavens.

"People realize, 'If I'm really busting my butt and delivering, there are rewards there,' " he said.

Raises can increase retention—but research suggests the benefits don't last long. A study from the University of Toronto's Rotman School of Management and Evolv Inc., a maker of workforce software, found that a 10% pay raise made employees only somewhat less likely to quit.

Any pay bump stokes "warm fuzzies" and make employees feel better about their jobs, at least for a little while, says Michael Housman, Evolv's chief analytics officer.

Those warm feelings stick around for at least a week but less than a month, after which point employees return to their baseline level of happiness and engagement, according to the study, which looked at 10,000 employees in Evolv's customer database. Separate research from Evolv found that managers, and not pay, hold more say over employee retention.

Shutterfly Inc. SFLY -1.58% employees are eligible for bonuses four times a year, with biannual salary reviews. The check-ins allow managers at the online photo publishing service to address employees' concerns, such as dissatisfaction with their pay, head-on.

"You can resolve problems early versus letting them fester," CEO Jeffrey Housenbold said. "If you let them fester for a year, usually people just go and update their LinkedIn profile," a signal that they may be courting other offers, he said.

The 175 employees at Chicago-based Solstice Mobile, which designs applications for mobile devices, have many chances to increase their pay.

Every quarter, between 5% and 10% of the staff gets a promotion, with a corresponding salary increase that averages 14%, according to the company.

There's another round of salary increases twice a year; during the last cycle, 70% of employees saw bumps that averaged 7% of their salaries. The average salary for the company's full-time staff is $84,500.

Chief Executive John Schwan, who goes by "J," claims a 98% retention rate, partially because of the salary structure.

Mr. Schwan said that young workers in particular respond to the constant feedback, but he also noted that workers sometimes grow stressed or upset when raises slow down.

Kelly O'Regan, 27 years old, started as an entry-level analyst in June 2010, landing a promotion and a $10,000 pay bump by that fall. She racked up at least four more raises by the end of 2012, ultimately ending that year as a principal, earning $95,000.

"Seeing that increase was like, 'Wow, this is quite different than what I had ever dreamed of,' " she said.

When her salary held fairly steady for about a year, however, she said she grew frustrated, but eventually came to terms with the fact that she had climbed to a level where raises are less frequent.

Mr. Schwan said company mentors help defuse lower-level workers' pay-related angst, holding "tough conversations" with mentees and encouraging them not to worry about how others are tracking.

To be sure, Mr. Schwan acknowledged, the mentors say they feel frustration when their own raises stall.

"It's definitely a risk," he said.

A few years ago, marketing-services company Epsilon introduced fast-paced raises and promotions to attract recent college graduates.

The company lowered the starting salary for certain entry-level jobs, and promised those hires a performance and salary review every six months for two years.

When David Lucey, the company's director of campus recruiting, first made candidates the new offer, he said many were skeptical. Mr. Lucey said they asked him: " 'Wait, what? Can't you just give me more now?' "

Now, the program is a big selling point, he said. New hires—60 of whom started on July 7—typically win all four potential raises and get at least one promotion.

By the end of the two-year period, the individuals wind up earning at least 20% more than they would have if they only had annual reviews, Mr. Lucey said.

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