Maintaining equitable salaries within an organization poses many challenges. Salary schedules are usually dictated from the top of the organization, but if you take the initiative to fight for what your department needs you can win. It depends on your approach. For all practical purposes most organizations follow some form of automatic progression system such as a general percentage increase across the board. Some modify the process and differentiate the percentage increases depending on the person’s performance rating. A person receiving an "A" rating will receive a slightly higher percentage than the person rated a "B" and so on. In practice this means that there is usually not much differentiation in salary increases.
Merit pay becomes problematic since an additional one or two percent hardly compensates for that extra effort put forth by some people. HR people prefer to align their pay schedules according to some predetermined plan that treats everyone the same. Although compensation is not a long-term motivator, some form of additional compensation must be provided for those who make a significant contribution.
As a manager you need to pursue the right to allocate increases based on the amount allocated to your group. Is this a difficult task? Yes. While HR experts will argue that money is not the major factor for instilling dedication, it is still a factor. You can’t build an excellent team by dividing the financial pot equally across all employees. Most teams will have a distribution of people; some will be super-dedicated, some will give you a day’s work and no more, some will make only marginal value-added contributions, and then there will be some that may not deserve to be kept on the team. Linking compensation to performance provides the best approach to recognizing this reality.
There was a time when pay for performance could be implemented easily: compensation packages were confidential. Many employees now know just about what everyone in their department is being paid. Employees speak about their salaries openly. Resolve any conflicts with the facts. Keep in mind though that the people in your department need to fully understand your priorities and what you consider value-adding contributions.