Tragedy and the Merit Increase

In a scene being played out at organizations nearly everywhere during this final quarter of the year, merit increase guidlines are being developed, modeled out against projected employee pay and performance data, reviewed, revised and run through the process again.

In many organizations, particularly those on focal point (common date) timing, real time data joins and begins influencing the process at some point.  For some, there is a need to shift the merit guidelines in order to stay on budget in the face of a performance rating distribution that takes a notably different form from what had been anticipated.  Hard choices must be made, which might include ratcheting back some of the extra increase opportunity that leaders had hoped to funnel to higher performers because the high performing population has now swelled (often inexplicably) to a size where such opportunities are no longer affordable.

Tragic.  In fact, it is a classic tragedy which dates as far back as Aristotle, a dilemma known as the Tragedy of the Commons.  Popularized in Garrett Hardin's 1968 Science essay by the same name, it describes the dilemma that occurs in complex systems when the short-term interests of individuals are at odds with the long-term interests of the group.  (Sound familiar?)

Wikipedia summarizes Hardin's article as follows:

This story describes a group of herders having open access to a common parcel of land on which they could let their cows graze. It is in each herder’s interest to put as many cows as possible onto the land, even if the commons is damaged as a result. The herder receives all the benefits from the additional cows but the damage to the commons is shared by the entire group. Yet if all herders make this individually rational decision, the commons is destroyed and all will suffer.

Hardin's particular interest in writing the article was to call attention to man's population problem.  He notes the importance of recognizing the commons as a resource - a resource that must ultimately be managed and even restricted in order to be used successfully.  He makes this point with population-related examples:

Perhaps the simplest summary of this analysis of man's population problems is this: the commons, if justifiable at all, is justifiable only under conditions of low-population density. As the human population has increased, the commons has had to be abandoned in one aspect after another.

First we abandoned the commons in food gathering, enclosing farm land and restricting pastures and hunting and fishing areas. These restrictions are still not complete throughout the world.

Somewhat later we saw that the commons as a place for waste disposal would also have to be abandoned. Restrictions on the disposal of domestic sewage are widely accepted in the Western world; we are still struggling to close the commons to pollution by automobiles, factories, insecticide sprayers, fertilizing operations, and atomic energy installations.

We encounter our own version of the Tragedy of the Commons when our organizationally-minded efforts to maximize the merit budget "commons" encounter the attempts by individual managers to pursue whatever steps are necessary to obtain the highest possible increases for their subordinates.  The more inclined individual managers are to prioritize their short-term wishes to be heroes and hand out the biggest possible raises, the less likely we are to achieve any real performance-based pay differentiation with our merit funds.

Can we, in today's environment, better influence managers' choices and hold them accountable for truly balancing the needs of their reports with the needs of the organization?  Do we follow Hardin's lead and place ever more stringent restrictions (think more zero increases and lump sums) on the process in order to protect and preserve the merit commons?

Maybe Aristotle's got some ideas for us...

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a range of client organizations.  Ann serves as President Elect of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review, the leading journal for those who design, implement, evaluate and communicate total rewards.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time (now working her way through Siddhartha Mukherjee's "The Emperor of All Maladies").  Follow her on Twitter at @annbares.

Creative Commons image "Tragedy and Comedy" by Tim Green aka atoach

Comments

[Dan Walter]

This is a great article Ann.

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It's really difficult to withhold increases to solid performers in order to give nice increases to high performers ---- but I think we will see more of that in the future.

A step beyond ----To survive I believe companies will need to differentiate more and more in favor of employees who have key skills and employees who are high performers.

And as a last resort ---- if money is really tight --- give the money to those with key skills even if other employees have higher performance.

If a company's high performers are Accountants and average performers have key skills -- the answer should be obvious. Give the money to those with key skills.

[Ann Bares]

Dan:

Thanks - much appreciated.

Jacque:

You've pinpointed the essence of the issue - really, the future of merit increases with any meaning at all will depend upon the willingness of leaders to withhold increases to solid performers in order to give nice increases to high performers. Not all organizations will buy into this (I struggle with it myself) - but those who cannot may need to move to a different base pay management approach.

I do agree with your "last resort" - we may no longer be able to use pay increases as a reward for performance. We may have to cede that territory to variable pay and use pay increases solely as an investment in driving skill development.

Thanks for the comments!

[Tony bergmann-Porter]

The alternative is to treat the merit budget as - in essence - a COLA, and use variable pay programs as the principal means of performance reward.