How to set the annual pay raise?

“We are soon approaching the time of year when we have to annually adjust our salaries. What´s your thoughts?” You consider it for a few seconds. 2023 was a tough year, and 2024 looks very uncertain. All costs have been creeping up from inflation. Your head of HR continues, "Our employees have been feeling the pinch of inflation personally. There's a general expectation for a significant salary increase, perhaps around 6%."

“Are you crazy?” you burst out. “Sorry, I did not mean it like that.”

“In our budget, I believe we have adjusted salaries by 3%,” you say. Janes shakes her head, “our people will be very disappointed if we end up there.” “Do you think we can go for a differentiated approach? Giving zero percent raise to one-third, 3% to one-third, and then six percent to our highest performers?”

“There will be an uproar if we do that. We have never differentiated when it comes to the annual increases.” “What should I do, you think to yourself? Whatever I do, people will not be happy.”

You are the CEO – what would you do?