An entrenched cultural belief is that employees should get a pay raise every year. There are three possible justifications for this: inflation, improved performance, or tenure in the job. Where there is a reasonable degree of inflation it is easy to give annual pay increments and HR does not necessarily have to be clear about the justification for someone's raise.
However, in times of low inflation, when an employee hasn't noticeably improved performance, or if the organization doesn't believe in paying for tenure, we end up with employees whose pay gets stuck on a plateau.
Rewards vs. meaning
The heart of the problem is that people believe they should be "going somewhere" and that things should be getting better and better. Take that away and people can feel a loss of purpose or motivation, which can lead to lower performance. This lack of motivation shows up quite clearly in some employees, who after years of striving, make a conscious decision to just do enough to get by. This is a risky strategy in a world where waves of downsizing are the norm. Still, it happens and it is a problem for the organization.
The best reward-based solution to this is a re-earnable bonus. People may not be getting further ahead, but they are at least motivated to work so that they don't slide down the hill. However, I think this is a case where we should look outside our reward toolkit for the solution.
The motivation for employees whose pay has plateaued has to come from something other than ever increasing pay. There are all kinds of things that bring meaning to work: developing new skills, doing interesting things, doing a really good job at your craft, mentoring younger people, being part of a great team, providing great service to clients, being part of an organization you are proud of, and so on. If the topic of meaning in the workplace interests you, check Dave & Wendy's Ulrich's book The Why of Work.
The risks of changing rewards
So the way to motivate employees on a pay plateau is to shift their attention from pay to these other sources of meaning. This is a difficult and potentially risky move. Imagine this scenario: you have been emphasizing how hard work will lead to ever higher pay, and then you turn around and say "We still want you to work hard, and while we won't increase your salary isn't it great that you are on such a nice team!"
The lesson is that you cannot suddenly change the reward message mid-career. The promise that hard work will lead to ever higher pay is one companies love to make and employees love to hear - and it is generally true in the early part of someone's career. However, it is not a sustainable promise. Rather than try to change our tune when an employee's pay plateaus, we are better off having a sustainable promise from the outset.
That sustainable promise is as much a matter of culture as it is of a formal statement in the employee handbook. Managers need to help workers focus on the aspects of the job that bring them a sense of meaning and accomplishment, rather than suggesting that the lousy conditions will be justified by a fat raise.
It makes me think of one global company where, due to tough times, many employees are not getting raises or bonuses. That should not matter too much if people love their work. However, an HR leader there told me that through the year people get little praise and the culture is: "Don't expect praise, your reward is the raise and bonus." When the company can't deliver on the pay increase, it is almost like a letter landing in the employee's inbox saying "We do not appreciate your hard work at all." The promise the company made to the employee, emphasizing monetary rewards above all else, has become dangerously demotivating in a world of plateaued pay.
Looking beyond rewards
There is one final lesson in this that always strikes me when I write about reward. All the things rewards are meant to do (attract, retain, and motivate) aren't always within a company's control. When we lean too heavily on rewards, such as letting people believe the fairy tale that pay goes up every year, we set ourselves up for trouble.
The HR leader responsible for rewarding employees has to push back against unrealistic demands, and make sure the other initiatives in HR are carrying their fair share of the weight for attracting, rewarding, and motivating employees. It's a fact of life that pay plateaus, and we have to make sure that our employees can live with that. Doing so means looking beyond reward for the solution.