Many of my friends and clients in various industries are deep into compensation planning this time of year. Though I am not a compensation pro myself (I focus on strategic, social employee recognition), I seem to attract stories of companies where employee recognition efforts are largely addressed solely through formal compensation – pay only. Below I share the story of one team of highly skilled professionals in one very large organization, and how this sole focus (poorly implemented) affects their daily motivation and engagement.
1) Moving the merit target.
In a small team of a half-dozen people who have worked together for nearly three decades, people talk. Over the course of the last several years, this team cannot figure out how the merit budget is applied. Performance is ranked on a typical (if discredited) stack-ranking model, and all the team members seem to fall in the 2-4 range each year. No one ever achieves the highest or lowest ranking, and they pass the 2, 3 and 4 ranks amongst each other year to year with no seeming rhyme or reason.
Every year, all members of the team are told the merit increase average – let’s use 3.6% for an example. Yet, every year, no one on the team, regardless of rank ever, receives even the merit average, and everyone receives the same increase – e.g., 2.2% for everyone on the team across the board. That, of course, leaves everyone wondering, “Where’s the money going?”
2) Hitting the pay range ceiling.
Since the members of this small team have been working in the same department for so many years, it’s not surprising that a few have hit the top of their pay range. For these team members, there is no possibility of a raise. They are offered instead an annual bonus that is supposed to make up for the inability to give them a raise. Since they are also skilled, hourly employees, however, these employees know full well the bonus in no way compensates for the lost extra earnings from time-and-a-half overtime potential on an increased base rate throughout the year.
3) “Promoting” to salary but reducing earnings.
Two of the team members who hit their pay ceiling were instead offered “promotions” to salary band. Since, as salaried workers, they cannot earn overtime, they were instead promised they would be “taken care of” with other bonuses to make up the difference. These bonuses never materialized, so these promoted employees assumed more responsibility while taking a pay cut (in the several thousand dollar range per year).
All three instances led to one result – growing employee resentment. Of course, these examples speak to poor management practices and poor implementation of how pay-for-performance is intended in the organization. The obvious solution is better management training. But a first step should be an honest, direct conversation with the entire team on their value to the organization and how that is compensated.
Even better, would be to stop relying solely on compensation and pay for performance as a means of communicating to employees the worth of their contributions to the organization. Yes, managers should better implement the program as intended, but additional levers should be added – primarily, a frequent, timely and specific social recognition approach. Every day, encourage all employees to notice and appreciate the good work of their colleagues and recognize them for it. Make it possible for celebration and acknowledgement of success to happen in line with the daily work, stop killing employee desire to do the work, and see motivation grow.
As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin, Montreal and Boston. Follow Derek on Twitter at @globoforce.
Hi Chuck ---- I've been involved in these situations and they're not fun. The toughest part is explaining to his/her co-workers why you met the counteroffer.
Posted by: [email protected] | 11/18/2013 at 04:55 PM
I must say that I have 'given up' on trying to allocate base pay for 'performance'. It is hard to do and becoming increasingly unpopular. Instead we have been suggesting that base pay adjustments be granted only for measured improvements in essential skill and competency over time. People then become 'more expensive' only when they have and apply more essential skill. For 'performance' I have come to believe variable pay that does not 'plow' into fixed pay cost works best. If you don't do a great job on variable pay metrics you 'get your moeny back' to try again next performance period. It is not a 'gift that keeps on giving'.
I know it is 'written' someplace that base pay changes need to be for differences in performance. However, it seems to me that variable pay works best. And it causes people to seek metrics that are more objective and related to business goals for some reason. I honestly believe that 'merit pay' is 'old fashioned' and dying at last. Or is that just wishful thinking?
Posted by: Jay Schuster | 11/18/2013 at 05:03 PM
Derek, precisely BECAUSE you are a total rewards person rather than a "compensation" guy, you get these tales of woe. Each example you cited was a classic case of bad total reward practice, in my humble opinion: (1) It only takes one broken promise to destroy trust forever; (2) Arbitrary pay range "limits" should be checkpoints rather than ceilings; (3) Punishing promotees is highly destructive. Those are all dumb policies, guaranteed to undercut the effectiveness of merit pay.
While I'm not quite as disillusioned as Jay, I certainly admit that good performance management is like good child-rearing: easy to mess up and difficult to do well. Those suffering from bad pay programs are frequently tempted to give up as they seek superior options. It takes a balance between cash and non-cash methods to succeed; and even both variable cash rewards and recognition plans can suffer from "merit" challenges.
Posted by: E. James (Jim) Brennan | 11/18/2013 at 06:09 PM
I'm basically with Jay on this one. In my view, base pay is - or ought to be - a return on firm-specific and non-firm-specific Human Capital.
In an era of 2.x% merit budgets, attempts to performance differentiate merit pay are as laughable as they are pointless. In my experience, applying an arbitrary performance distribution schema to an organization in the primary labor market adds insult to injury and is a recipe for both management and employee demotivation and cynicism.
As long as your performance management system will remediate or remove poor performers, and subject of course to ability to pay, a much better approach is to make annual increases essentially across-the-board COLAs.
As long as you can identify and define meaningful and objective business goals (and yes, the devil is most definitely in the details), THAT is the place to reward performance; and as Jay correctly points out, by doing so you don't annuitize it.
Posted by: Tony Bergmann-Porter | 11/18/2013 at 08:08 PM
I think Jay is on the right track. Compensation systems need to change with the times, and new schemes of reward, cash and otherwise, should be developed. Base pay adjustments should occur only when skills are added or enhanced, or when more/different responsibilities are assigned. Specific performance rewards should be handled through variable means, where employees could be recognized multiple times per year.
Also, Derek is being too kind when he suggests that the solution to the poor management practices outlined in his example are management training. I'd throw the bums out, starting with the CHRO, and bring in people with intelligence and competence.
Posted by: John A Bushfield | 11/19/2013 at 05:38 AM
I think we need more 'new ideas' in our profession and replacing 'merit base pay' would be a good start. Few organizations do a good job on performance management unfortunately. And at least we have the opportunity to 'get our money back' if we don't do a good performance job if only a 'lump sum' or 'variable pay award' is involved. Our profession (in my opinion) does not enjoy the attention it deserves and received a decade ago. And I believe that is because we have become so 'ho hum' that nearly anyone armed with some survey data can do the job as it is currently defined. We just need to 're-juice' our profession and that starts with people who watch this super blog.
Posted by: Jay Schuster | 11/19/2013 at 09:59 AM
Sounds great in theory but only for a few select firms. I think the same thing when people talk up unlimited vacation or work anywhere, even on a beach.
When you have the majority of your workforce as non-exempt employees - FLSA play a part in variable pay and OT. Depending on the industry very few non-exempt employees get to see or affect the big picture. Yes, reducing waste can be a target, but managers do prefer robots who don't question to people (thinking of the 7 trends).
Posted by: Lisa J Williams, SPHR | 11/20/2013 at 11:02 AM
Lisa - I'll have to brush up on my FLSA knowledge, but I don't recall seeing any barriers to offering variable/bonus pay to non-exempt employees. Insofar as this population seeing or affecting the 'big picture', all employees, regardless of FLSA status, should be respected for the contribution they make. Relegating this segment of the employee population to mushroom management under the assumption that they 'just won't get it' shows a level of ignorance and arrogance that prompted FLSA legislation in the first place.
Now, you'll have to excuse me; I need to apply some suntan lotion before I take a dip in the ocean.
Posted by: John A Bushfield | 11/21/2013 at 05:38 AM
How can a company compensate and remunerate its employee secretly that other employees don’t get to know? Please advise.
Posted by: Girish | 11/27/2013 at 06:59 AM