The rise and fall of the merit raise
ningcontentNot long ago, most workers considered merit raises a pretty sure bet, counting on them coming around every year along with their annual performance review. In boom times, even sub-par performers usually got some kind of token raise, and top performers were well rewarded.
However, as the recession continues, we find this particular compensation model increasingly falling off — although pay-for-performance in general is still big.
The problems with merit raises? Well, they’re the cost that keeps on costing — year after year, the increase is built into an employee’s salary, and percentages only build from there. A one-time bonus can be a smarter way to recognize stellar performance. Another issue is that these types of raises are not always implemented fairly — and yet, attempts to smooth out percentages to make them more “fair” (people talk, after all) can alienate top performers.
In her blog post “The End of the Merit Increase,” Ann Bates of Compensation Force declares, “Pay for performance is here to stay, but merit increases — possibly the longest running and most prevalent form of performance pay — may be on the path to extinction.” Bates explains that base salary increases are not a terribly effective method of rewarding performance, and makes a case for variable pay increases instead:
Unlike merit increases, the variable pay slate can be wiped clean each year, allowing more room and opportunity for experimentation … and for mistakes … and for reactions to unanticipated course changes. This helps create flexibility and agility in reward plan design, enabling organizations to adapt to a fast-changing business environment.
A May 2009 study from the Institute for Corporate Productivity (a.k.a. i4cp ), detailed in “More Companies Adopt a Pay-for-Performance Program,” breaks down the most recent trends. Between 78 percent and 84 percent of polled companies say they do tie pay to performance. As for poor performers, more than half of the companies (54 percent) said that they do not grant merit raises to low performers. (This leaves 46 percent giving merit raises to low performers, which indicates that what we call “merit” increases are perhaps not truly tied to merit.)
The study also revealed that most organizations offer only slightly higher merit raises to their high performers than to their average performers. Average performers were most often awarded between 3 and 4 percent. High performers clocked in between 4 and 5 percent — which seems frustratingly close to the typical reward for average workers.
Explains i4cp research analyst David Wentworth:
Companies are becoming more willing to withhold merit raises for poor performers, but in general they are still not truly distinguishing the top performers from the average. This could be due to a fear of creating a perception of unfairness when they are trying to find the fine line between the good and the very good.
So, what percentage increase really feels like a merit raise to the employee? Three? Four? Five?
Try seven percent, according to Jason Shaw, professor of human resources and industrial relations at the University of Minnesota’s Carlson School of Management in an article called “Money and Meaning” by Jack Gordon.
In today’s economy, even employers who haven’t had to cut or freeze pay might be forced to choose between small, across-the-board increases for the many or bigger merit raises for a few star performers. Shaw has found that a bump of at least 7 percent is required before the average recipient perceives it psychologically as a “merit” raise. Keep that in mind when you look at your resources, count your stars, and do the math, he suggests.
If you’re lucky enough to still be at a company that gives merit increases, it’s time to do some serious thinking about which approach you are using with the salary increase budget you have on hand. Differentiation has more impact with employees than uniformity does.
Article by, Sarah and courtesy of RiseSmart.com – RiseSmart: Search Smarter. Rise Faster.
