“Joe, thanks for your great contributions over the last year! Please enjoy this venti mocha latte in return.”

Sound absurd? Perhaps not.

With salary surveys projecting average 2012 budget increases of 2.8 percent, the net impact on Average Joe’s take-home pay amounts to less than $5 a day. A latte a day does not keep star performers in play.

For organizations that espouse a pay-for-performance rewards culture, the annual merit-based salary-increase system is often a fallacy, if not a downright farce.

Good intentions easily go awry when it comes to awarding – and receiving – performance-based pay increases.

Employee: You conquered every goal over the past year. You played nice in the sandbox and perhaps even cultivated a few new connections along the way. At the very least, you successfully avoided leaving a trail of relationship carnage in the wake of your progress. You’re damn proud of your accomplishments and the relationships you’ve nurtured, and you should be.

But let’s be honest. Can you clearly articulate how you’ve delivered results far beyond what was defined and expected? Did your performance deliver such epic boom that it changed the game? Be realistic. As Gloria Steinem said, “The truth will set you free. But first, it will piss you off.” It’s OK to be proud of your Average Joe performance – just be prepared for Average Joe rewards, and enjoy your venti mocha latte.

Manager: You conveyed the company’s mission and vision all year. You translated strategy into individual and team S.M.A.R.T. goals. You coached the best performance from every member on your team. But truth be told, the results of individual performance never stack up equally across the board. Best intentions do not hold par with best execution.

When it comes to differentiating performance down to the bottom line – employees’ paychecks – your leadership courage is not only put to the test, it’s put on display. Oh, yes, employees do talk. There’s no room to play it safe by spreading your 2.8 percent salary increase across the board like creamy peanut butter. Even with minimal budgets for salary increases, allocate the greatest rewards to your strongest players. Undervaluing Rock Star’s performance while pouring artificial sweetener into Average Joe’s latte sends strong mixed messages to both camps, and it’s a sure trigger for turnover.

Executive: Despite responsible attempts at containing costs over the past few years, labor will continue to remain at the top of your expense sheet. Maybe you’re seeing subtle signs of an economic uptick and can now factor salary increases into your 2012 budget. If you’ve set a rewards strategy that pays for performance, hold strong.

The most important role you play in a company-wide salary increase process is ensuring that reward budgets are bringing the company the greatest possible return. That is, you’re in charge of driving your sizable investment proportionately to the talented rock stars who’ve demonstrated game-changing performance and delivered outstanding results. Carefully review your recommendations and calibrate rewards across the organization for consistency. Challenge any data rolled up to the C-suite that contains a disproportionate number of “average” ratings.

The good news is that pay freezes appear to be moving behind us and salary budgets are slowly rising. Yet, near-record-low salary increases are still in place, so it’s more important than ever to invest reward dollars where they are most deserved. Send a strong message to your rock star performers that you not only notice but also truly value their contributions. They’ll appreciate getting their just deserts, and Average Joe will still enjoy his venti mocha latte.

Yes, it takes guts to rob Peter to pay Paul. But unless you insist on differentiation, you might as well abandon your pay-for-performance strategy and trade it in on a simple cost-of-living adjustment.