It's an old story. An employee has a good year and they are rewarded by a hefty salary increase and a fat bonus. The unsuspecting manager thinks s/he has done the right thing. What they don't realize (or don't think about) is a base salary is the gift that keeps on giving. How so? Because even if the employee never has another good year, they will still be receiving the money from that base salary increase for the rest of their time with the company.
To underscore the point, imagine an employee who earns a $70,000 base salary receiving a 6% increase for a job well done. That amounts to $4,200 per year EVERY YEAR for as long as they remain with the company. Multiply that by all the raises given to all the other employees, and you begin to grasp the magnitude of the problem. Then, when you add a bonus payout into the mix, things get really hairy. So in essence, paying a base salary increase and a bonus for the same performance is not merely double-dipping, it is "endlessly dipping" because that is how long you will keep paying for that one good year.
How do you break this cycle? By realizing that you should make base salary increases and incentive payments for DIFFERENT things, not the same things.
WHEN TO GIVE BASE SALARY INCREASES
Base salary is the money you invest to acquire talent in the market place. This talent is freely traded and you must pay a certain amount for certain knowledge, skills, and abilities. As the value of a particular type of talent increases over time, you must stay current or you run the risk of being outbid for that talent by your competitors. A person's knowledge, skills and abilities is the raw material they use to get results -- but it is not to be confused with the results themselves. We all know people who have all the ability in the world but get very little done. We also know people who lack certain skills but accomplish great things. Whey it comes time to grant salary increase, forget about the results a person achieved. Instead consider whether or not the person's knowledge, skills or abilities have increased (or whether their existing skills are worth more to the company or its competitors. If so, an increase is called for. Otherwise, no increase.
WHEN TO PAY AN INCENTIVE (OR BONUS)
This is where you pay for results. Unlike base salaries that should be paid when an employee acquires knowledge that is of value to the business, incentives (or bonuses) should be paid for outcomes (that is, the results achieved using that knowledge). No results, no incentive payouts. And just because some important result was achieved doesn't mean a base salary increase is called for. This is the unnecessary and costly double-dipping already mentioned.
THE PERFECT PAY PROGRAM
The good news about managing pay this way is that if you make a mistake and grant a base salary increase for the wrong reasons, you will literally be paying for that mistake forever (unless you decide to lower someone's pay which is never a good idea).
Incentives are much more forgiving -- if you pay an incentive for the wrong reasons, you get to start over and try to do better next year.
By clearly understanding and communicating when it is appropriate to raise a salary and when it is appropriate to pay an incentive, you will be using your compensation tools for the precise purpose they were intended. This will not only save you money, it will help employees understand how their skills and achievements relate to the overall performance of the business.