Mandatory salary increases are common in Europe and in some parts of Asia and Latin America. The mechanism for the increase can be a fixed percentage, a flat amount or, in some cases, an individualized calculation. Depending on the country, the increase can be a statutory requirement, it can be negotiated with a trade union or works council or it can be bargained by site.

Sounds pretty straightforward, right? In the abstract, perhaps. But envision this scenario… Your company’s new CEO is sitting down with you for the first time to review your salary increase budget recommendations for the upcoming year. The CEO has never done business outside the United States. In my experience, you can expect some variation of the following conversation…

CEO: “Why is the budget for Belgium so high?”

You: “Because we need the budget to cover the forecasted mandatory increase.”

CEO: “Did you say mandatory?”

You: “Yes, we have a statutory requirement to give an increase.”

CEO: “Well who decided that?”

You: “The government.”

CEO (under his/her breath): “Of all the pro-employee, anti-competitive….”

In fact, if you are going alphabetically, you can probably expect the CEO to be seriously considering discontinuing European operations by the time you get to Germany. Italy at the latest.

While mandatory increases can create quite a few challenges for compensation professionals, I’d argue that the biggest is the visceral reaction of U.S. managers. The idea that employees are entitled to an increase is anathema to the pay-for-performance philosophy that so many of us embrace. The very thought of giving a significant increase to an underperforming employee makes us hyperventilate. So how can we possibly reconcile ourselves to it?

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