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10/10/2012

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I agree Stephanie. I don't think I would want to risk keeping base salaries status quo in this environment. Even if there is still not a lot of turnover right now, companies are anxious to keep the employees they have --- especially since they say they can't find the "talent" they want on the outside.

Relying only on contingent compensation to differentially reward your best workers is a chancy tactic that can backfire. If your consistently best producer has an off year but does not carry a strong base pay (like at a 110% market ratio) forward and their TC is permitted to sag to 95% or 100% of the MRP, they may get disgusted and accept the next offer that acknowledges their usual lead status. The Federal General Pay Schedule operates the way Dr. Scott seems to prefer. While it is sometimes effective in retaining competent workers, it is not renowned for its ability to activate excitement. Yes, adequate differentiation is quite problematic when so little money is available for increases, but P4P is the horse what brung most progress in the last sixty years and will be quite difficult to abandon.

That said, his observations are valid, but there are many other preventive and contingent options besides the wholesale revolution that would be required to eliminate the traditional effect of cumulative merit performance sustained over many years on base salary. Easier to start fresh that way than to convert a normal pay program where contrary expectations had been established.

Dr. Scott has put his finger exactly on where the future of reward and recognition is headed. The only component he left out is total transparency with regard to who makes what, and his suggestions make that exercise easier to accomplish.

Sure, change is risky. Sure, current economic conditions are dicey and uncertain, and attracting and retaining top talent is challenging. So what's new? Strap yourself in and put your tray tables into their full upright and locked position, 'cause what we're experiencing ain't going away anytime soon.

Annual merit programs and P4P philosophies may have worked in the past, just like buggy whips were once a very effective transportation accessory.

Dr. Scott, while minimizing the difficulty of execution, has it right, and I applaud his views.

Clearly Dr. Dow Scott is living in an academic world and has never had to administer such a program. For those of us in the compensation trenches, determining increases by position is a tremendous amount of effort and I certainly don’t have a bevy of comp analysts to review competitive practice for every job, every year.
We’ve gone away from the “merit” concept this year for the first time and trying to focus managers on building employee engagement for all the reasons cited in the article. So I guess we are on the cutting edge. It’s been a hard pill to swallow for some of our managers and I’m not sure they’re buying it. It has to be backed up with LOTS of manager training on how to recognize and reward performance with other means besides an annual increase.
Only time will tell…

Per Scott: "Adjustments in base pay can still occur, but only to account for changes in the price the marketplace pays for a particular position -- not for increases in the cost-of-living or individual performance."

That's a doozy there. Other companies grant merit increases to their employees, you fall behind the competition and have to give a base salary adjustment to catch up. Great idea! Is the adjustment performanced based? He didn't say so! Back to the drawing board with this great idea! What you have here is a defacto merit increase plan.

Merit (from freedictionary.com)
a. Superior quality or worth; excellence: a proposal of some merit; an ill-advised plan without merit.
b. A quality deserving praise or approval;

"Congratulations! You are at the top of your group. We are so impressed that we are going to give you a 3% raise!"

I can't imagine why that message is not compelling.

There is a problem. The time-tested merit increase, as performed by most companies, is not the solution. Some companies will be able to enact Dr. Scott's ideas successfully, others will need to find different solutions. Very few can confidently argue that the status quo is truly effective.

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