[noonespecial]

You're granting them way too much introspection. In reality its goes more like:

"Company policy is that raises are no more than 2.5% per year with a perfect yearly review. You got your 2.5%. You can't have a raise." Umm I'm about to leave and get 30% more from your competitor! I know you don't want that and I don't want it either. Surely... "Company policy is that raises are no more than 2.5% per year..."

[gjm11]

Of course! But the question is why there would be a policy of no raises above 2.5%, and I think the reason is the sort of thing I describe.

In response to others who said "this is a good recipe for losing your best people": yeah, it might be. But if you don't believe your best people are dramatically better than the rest, or if you think that actually your best people aren't the same as the people who will go shopping around for higher pay elsewhere, maybe the calculation works out differently.

Also, for the avoidance of doubt, I'm not saying that this is good on balance. Only that it's not so hard to understand how a company might arrive at that sort of policy while trying to maximize its performance.

[Latteland]

the answer is that company policies like only small raises are dumb ass, and are clearly bad for the company. We all know if someone knowledgeable leaves, it will take time for the new hire to ramp up, and replace an existing good person. For that reason we should try harder to keep them. But higher up the ladder, people look at stats like average pay - it's much harder to measure productivity than average pay, that's why pay is used in stupid ways, in negative incentive ways.