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Hi Chuck,

Can you clarify if you see a difference in how companies approach merit pay differentiation based on whether they have a holistic approach to rewards that include incentives, recognition and equity vs. only using base pay?

My goal as an external consultant or internal practitioner is to move companies to a more holistic approach. In my opinion, if the only reward component you have to work with is base pay adjustments you will never have an effective practice (you can’t build a house using just a hammer). Each component has a different purpose and time horizon and their overall effectiveness is in how they are integrated and balanced.

I agree that a straight “peanut butter” spread is not effective if you are striving for a pay for performance culture, and I also believe that taking a merit distribution to the other extreme can be just as ineffective if it is the only component you have. In my opinion, the only way to create an effective reward program for the long-term is through the balanced use of all components.

I think this is why I have a hard time writing my own posts that focus on just one component without setting the broader context.

Thanks for the post.

Trevor -

The challenge facing anyone writing for a blog is that you're limited in the amount of words for each article, to say 600 - 700. That amount of words doesn't give you an opportunity to appropriately cover issues with multiple moving parts. If you spread your comments too thin, trying to cover all the angles, you run the risk of too shallow coverage on your main point. There have been many times that I wished to present a more thorough coverage of a topic, but word limitations prevented me. A blog is supposed to be relatively short and focused. That's why my monthly newsletter articles are longer - to give me more room for more moving parts.

For what it's worth I do agree with you on holistic approaches, but that was not the point of my piece.

Chuck - I was going to make a similar observation to Trevor's, because we all know that sound compensation practices are not binary exercises; it's not an all or nothing game.

Skinny merit budgets have become the norm over the past 10 years or more, so your 2% example is not far off from reality throughout much of Corporate America. The fact is that this notion of 'pay for performance' has become a sham in most organizations that promote it. There are many reasons for this reality, tight merit budgets among them. But the real culprit is the performance review process, which has become nothing more than a bureaucratic exercise that everybody hates. People need performance feedback, but given once or twice a year in a hierarchical fashion to distribute meaningless salary adjustments has become counterproductive with little or no credibility attached to it. It's a generally accepted fact the the PA process is broken, yet companies still use it to justify their 'pay for performance culture'.

Frankly, giving most everybody 2% increases against a 2% merit budget is a more honest approach, and probably just as effective.

John, I agree and think most companies say they have a pay for performance program but it is just lip service. I don’t think the size of the merit budget is the cause. In my opinion too many companies are not really thinking through their reward strategy holistically. If they are using more components than just base salary they are thinking about them independently and not as a holistic tool. Worse yet, they are just following marketplace trends instead of creating programs that are specifically designed for their business.

The range of base pay adjustments that make sense are relative to the overall budget and company situation. Incentive programs with as little as 5% target opportunity give a better platform to differentiate based on performance.

It’s time to release the pressure on base pay as a tool to solve all pay issues. It’s one component, not a complete solution.

I also agree most performance management process are ineffective. I’m not sure this will change until companies create a real-time performance management culture. A program driven from HR will not solve the issue.

Good discussion here. Note that line managers control the performance of their people, not HR. If HR does a good job of giving supervisors appropriate training, opportunities to learn by practice, adequate resources and effective tools to apply, all will be well. Otherwise, not.

This, from someone who wrote a big heavy book on Performance Management for Prentice Hall.

Jim - Line managers may control the performance of their people, but most suffer severe cases of ADD and have difficulty with time spans covering a week, much less 6 months or annually. Training might help, but few HR organizations seem capable of effective delivery.

No, it's the system that's flawed, which includes the way performance feedback is communicated and the comp plan which allegedly supports it.

My own belief is that there needs to be more emphasis on variable plans and less on base salary adjustments, and more involvement by team members in the process.

Having spent some years in management training before returning to compensation, I have no disagreement with you, John.


Interesting thoughts.

While I agree that a standard one-size-fits-all approach is definitely counter-productive, often there are times when the Comp team has to take a holistic view and are forced to give 'something for all'.

As a captain of the ship, you cant reward only your ace-rowers... You need the average Joe's too to balance the load at least till the ship reaches the shore.

An alternate approach could be to bucketize the 2% amount into 3 buckets (Bucket A: base pay hike, Bucket B: Performance driven pay and Bucket C: Star awards) based on your comp structure. Say you had a $100 amount available to distribute, each bucket will have approximately $33. While Bib-the-Bumbler gets from one bucket A, Joe Average will get the pie from 2 buckets (A & B) and the Star performers will get the share from all the three buckets. So while this ensures that everyone gets peanuts, the best get the peanut, butter and the chocolate (plus the wrapper) :)

Ashwath: re the three buckets - this is all well and good, but 1/3 of 2% is 0.6%. On a $100K salary, after tax, that amounts to a (weekly)medium pizza.

Chuck, while I do not suggest that we concede merit pay for cost of living, it is really for psychological reasons, i.e., we do not want to say that we do not pay for performance. But the reality is that merit pay cannot provide a meaningful reward for performance. There is little room to maneuver since organizations no longer have zeros. Most employees have not seem a merit budget of more than 4% in their entire career!

A recent study showed that the "average" performer received a 2.7% raise, while a superior performer received 4.0%, a 1.3% premium. For an employee making $50,000 a year, that is $650 a year or $12.50 a week. Before taxes! That is not going to motivate anybody.

It is time that stepped back from merit pay and asked how we can really motivate our employees.Think about what you want to reward and how your employees want to be rewarded. Consider how the perceived value can be increased through cash bonuses, lifestyle bonuses or career bonuses . Just don't count on merit pay, because it has not been very exciting for a long-time.

Hi Chuck,

An interesting point of view. You've commented on an outcome option - flat increase across the board or differentiated increases. What I would look at is the compensation and performance philosophy and strategy of the organization. If your position is that broad brushed approaches do not work then I think the argument for a one style (variation in increases) approach is also not the answer.

I've worked across multiple countries with varying management styles and cultural maturity and I would strongly suggest that answering the core/basic question on the organizations philosophy and strategy in this area will not only drive a positive outcome for all involved but also position the question for leadership to make the right choices. It can also clearly position what the performance review is all about and how it aligns to the organizational needs.

It is great to have a robust discussion on this and get the comp/talent leaders thinking more about these issues - thanks for leading the discussion.

If the company doesn't have money for merit increases that year, that's an indication of some larger issues and perhaps a sign of things to come. It could also be a sign that the "higher performers" didn't do the job they should've done. I think I'd leave this company too, quite frankly.

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