Willis Towers Watson released a blog earlier this month that deserves our attention. On the face of it, it looks like one more whine about what to do with our unrelenting 3% budgets. But if you look closely, you'll find practitioners who are finally willing to speak candidly about the "losing game" we've been playing by simply shifting our small pile of money toward high performers.
They posed the following questions and you should, too.
'If most of the [increase] budget is meant to reflect "market movement," why are we disguising it as "merit"?' Truthfully, that's what it has boiled down to over the last few years, hasn't it? If only the stars get 3.5% or more, then most employees' increases either match or fall behind "market movement." These employees haven't "merited" anything but a market adjustment just like the market adjustments their grocery store is paid when they take their Cocoa Puffs off the shelf throughout the year. It may have taken us a few years to realize it, but this is how the "3%" situation has played out. To continue to communicate our increases as merit is ducking the truth, and I think it will do our profession no good in the long run.
"Do all increases need to be differentiated?" We have a few years of experience and data showing that true differentiation can be impossible when you don't have much to go around. It's time to challenge our sacred belief in differentiation. Use the data you already have to examine your practices -- without shame or scorn. What do your findings tell you? Now combine these findings with data on the effectiveness of your incentives as a form of recognition and reward. Could your combined data end up telling you that you've slowly strayed into a variable pay scenario? If so, time to rethink the differentiation "responsibility" of your salaries, don't you think?
"Should base salary increases really be tied to last year's performance?" This eternal question is worth resurrecting for your 2017 planning meeting. The fundamental issue is the alignment between our traditional pay-for-performance philosophy and your evolving business culture. Are you placing more emphasis on employee potential or critical skills these days, to be sure that your company rides out the challenges you're going to face in the next few years? If your business is changing quickly and somewhat unpredictably, odds are that past performance is less able to predict future performance than it has in the past. So why keep looking backwards when you need the "right" people to keep you moving (urgently) forward?
There are two other important questions to ask, according to the blog article, so include these on the agenda, too:
'Is the "annual" increase cycle the right cadence?' Or would you more effectively provide recognition with a more flexible, year-long increase budget that allows you to give increases more closely linked in time to the employee achievement.
"Would your organization answer these questions this way for all job functions or all talent segments? Does a one-size-fits-all approach to merit increases still make sense?" Sales has always had its own compensation approach. Is it starting to make sense to tailor programs to other functions in your organization? Does it really make sense to continue to be so uniform across your organization? For example, do you still have a really good reason why headquarter functions should be paid the same way as (and motivated the same way as) software engineers, or warehouse managers, or lead researchers, or, or, or. It's worth kicking around, don't you think?
Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create the DIY guide to compensation leadership, Everything You Do (in Compensation) Is Communications @ https://gumroad.com/l/everythingiscommunication. Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, communications and leadership to topics like the CEO Pay Ratio, performance management and compensation implementation discussions at the Café. Margaret is a Board member of the Bay Area Compensation Association (BACA). Before founding re:Think Consulting, she was a Principal at Willis Towers Watson.