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Agree that rating scales of 7 and even 5 are "splitting hairs". All you need to know are who the top and bottom performers are ---- all the rest are the middle.

Excellent post Chuck. Differentiation (and segmentation) are certainly hot right now as organizations attempt to reward their critical skill sets and high performers. Here is an article that says you really need to increase pay by 7% to get the employee to recognize the connection between the higher performance and the increase. Good Stuff. Mitra, Gupta, and Jenkins 1997 http://onlinelibrary.wiley.com/doi/10.1002/(SICI)1099-1379(199703)18:2%3C117::AID-JOB790%3E3.0.CO;2-1/abstract

Can I ask if you look at rewards holistically? With the existing limited merit budgets do you really think this is the best/only place to reward performance? Are you comfortable decreasing your successful performers pay in relative terms? Your successful employees are not just “clock watchers” wasting space as you seem to think. If their increases are not keeping up with labor inflation you are actually decreasing their pay in relative terms. What do you think of the cost of disengagement and/or attrition that this can lead to?
Might it be more appropriate to differentiate rewards to a greater degree when it comes to recognition, incentive, and equity (were appropriate)? We are likely to be living with reduced merit budgets for some time, differentiating merit increases is easier when you are working with 5% budgets but everything is relative.
Top and hyper performers are very important and there are many other ways to reward them for their results. I’d prefer to create programs that are less likely to result in a zero-sum game. Here’s a post I wrote recently. http://integrated-rewards.com/2014/02/rewarding-hyper-performers/

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