Increases as a Percentage of Job Value

The Percentage of Job Value approach seems far superior to the antique habit of awarding increases according to base pay.  Instead of giving a percentage of the base rate as the reward, make it a percentage of the midpoint job value or Market Reference Point (MRP).  That simple method completely avoids the many problematic issues of merit increase grids, which are complex systems, both difficult to create and hard to explain. 

Granting the same percentage of a common midpoint or MRP for the same performance is eminently fair.  Also, it is far clearer and easier to communicate than awarding weird personal awards that compound if not modified by an awkward merit increase grid. 

If two peers holding equally valued jobs perform at the exact same performance level for a specific evaluation period, it seems right for them to get the same merit-related cash reward.  Allocating increase amounts or bonus pools according to personal pay, on the other hand, can create terribly dysfunctional distributions.  Makes no sense to say that superior performance is worth more money to a well-paid incumbent than to a lower-paid peer, when logic would argue the opposite.  Great output results from a person working at a bargain rate would be remarkable, while such top levels of performance should be normal for a highly paid incumbent who has earned premium pay for a long time. 

The size of a personal salary accumulated over many years of past compounded base pay increases should have no relevance to the value of output results in a later period.  If retention is a concern, that should be a much bigger issue for the low-paid worker than for their compatriot who does the same work at an inflated rate that far exceeds the market norm.  People who have been historically generously compensated for many years by hefty guaranteed base rates have no right to an infinite entitlement to the largest increases. 

Merit increase grids are therefore used by many who apply increase percentages to base pay.  They can prevent uncontrolled compounding but have many drawbacks.  Merit grids are complicated to design, construct, administer and explain; and they earn criticism for “punishing” high earners by imposing lower increase percentages on those with higher compa-ratios.  There are many potential negative consequences to applying reward percentages to base salaries, and the traditional corrective matrix grid has accumulated a wide variety of defects over the years.

There is a better way.  Instead of referencing a complicated subjectively created table with projected estimates of frequency distributions to slow the range penetration trajectory for high-earners, you can just apply your increase percentages to the Job Value (or Range Midpoint, Control Point or MRP).  That much simpler approach provides perfect symmetry in absolute pay distributions that are controlled by the value of the position and the personal performance of the individual worker without regard to the size of their current wage or salary.  No table.  No cut-off points.  No arbitrary parameters.  No complexity.

A number of strings in various discussion forums cover this topic, generally findable under “using the Job Value” or “Brennan Payout” approach.   The practice has been around for a long time in both the U.S. and Canada, with instructions published various places (i.e., in The Personnel Journal and the Performance Management Workbook) in the past.  It has been extremely successful when used; yet many compensation professionals are unaware of the method.  

“Relatively absolute” payments computed against normative job values are far more equitable than percentages applied to personal base pay amounts.  Same job worth, same output value, same absolute reward dollars.  How could such perfectly fair treatment be wrong?

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

Image "Percent And Dollar Symbols" courtesy of renjish krishnan/FreeDigitalPhotos.net

Comments

[Shawn Miller]

Jim, I've read your postings (it seems like) forever, and for some reason this is the first time I remember hearing of this concept. Thank you. Now I need to sit down and run the numbers to understand how to transition from a current matrix-driven process to the Job Value methodology. (Hey, I even went out and purchased your book yesterday) :)

[Dave C]

Jim,
Interested in learning more about the Job Value approach. Though you indicate its been around a long time in the U.S., a Google search for "percentage of job value" only returns this issue of the Compensation Cafe. Can you please direct me to a public domain educational source so that I can learn more about the concept before purchasing a workbook?

Also, if establishing and maintaining a meritocracy is an important tenant of a performance management and compensation system, how does the Job Value approach differentiate and reward varying levels of performance?

Thanks for the post!

[Trevor Norcross]

Hi Jim,
I’m not sure I understand the intent of this method. It seems like you are advocating basically not having a top of a market range or limitations on pay increases beyond the top of the market range? If you have a lot of tenured employees that stay in the same role wouldn’t this tend to increases your cost structure and potentially limit the motivation for career progression?

I am also not a big fan of hard market range maximum but your suggestion seems to have the potential to accelerate pay above the top of the range. If you have a job with a market range of $40k - $50k - $60k with two top performing employees, one making $40k and the other at $60k. If you give them both a 5% increases based on the midpoint ($2.5k) their salaries would increase to $42.5k and $62.5k. With this approach you are unable to overweight the lower paid top performer to a greater degree to help catch them up. Doesn’t this perpetuate the retention risk of the lower paid top performer? What if the higher paid employee is already making $65k, $70k? Is there any point in which you would want to slow down the value of pay increases for high paid top performers?

There are always many individual issues that may make this approach appropriate but I think both merit grid and increases as a percentage of job value approaches in purity have their flaws. IMHO both limit the manager’s ability to take other factors into account. Both are confining the outcome to a mathematic formula.

Each employer has to understand their employee population and how any approach would work in practice.

Thanks,

[Barb]

Many merit matrices accomplish the same thing as this idea, since higher paid employees in the upper range areas generally receive smaller merit increases, on a percentage basis, than lower paid employees with the same performance level.

I do not find merit matrices difficult to comprehend as Jim states. Just because they may be difficult for some people, doesn't make them wrong.

Flat dollar pay increases have the strong whiff of a union environment where individual contributions are minimized and everyone is treated "equally."

[E. James (Jim) Brennan]

Trevor & Barb: good points! Limits to increases are always arbitrary and can be established under any approach; i.e., none for compa-ratios over 125%. Extra approval levels should be required for raises that bring incumbents to levels far above competitive ranges.

Your math is correct, Trevor: the veteran would go from C/R 120% to 125% with their $2,500 and the novice's C/R would grow from 80% to 85%. Note that the rate of closure between the two improves markedly when they get 4.2% and 6.3% of their base pay this way ($2,500 each) respectively versus from using the conventional method where each would get 5% of their base salaries so their C/Rs would grow farther apart. In reality, any novice paid 20% below the market (the person making $40K for a $50K job) would not catch up to the midpoint under any grid or job value system in under twenty years, which is awful!

Barb: no big disagreement, but merit grids can be complex to create and difficult to apply & explain while the Job Value approach is quite simple and permits precise budgeting without forced distributions. "Flat dollars" only apply when the people have the same performance in jobs with equal values. Different performance, different raise, just like with a merit matrix but this reallocates a bit more aggressively than the standard merit grid. Not recommending any uniform step progressions, at all!

[Mark]

3K 3.5K 4K 4.5K

8% 6% 4% 2%

6% 4% 2% 0%

4% 2% 0% 0%

2% 0% 0% 0%

[E. James (Jim) Brennan]

Nice aggressive merit grid, Mark. The more you make, the smaller your merit increase as a percentage of your pay, right? Seems simpler to just say "same grade, same performance, same percentage applied to your job value and same reward," although the example I showed won't parse the extremes as much as that grid where the same performance in "the same" job yields "different dollars." You actually CAN create wider distributions at the extremes with a Job Value approach, but that requires an additional Payout step not covered here.

[E. James (Jim) Brennan]

Dave C: sorry I failed to respond to you first. Unsure where academics may have covered the topic. I first published on it in the PJ of May 1985 ("Merit Pay: Balance the Old Rich and the New Poor"); believe ASPA named it as one of the top HR concepts of the year. Maybe friend and occasional associate Dick Henderson covered it in one of his compensation text books or it might be included as an option in some comp practice courses. No need to buy a book, though.

As later answers showed, a different % of Job Value would be applied for each Performance Rating level: e.g., A=5%, B=3.3%, C=2%. Sometimes it's easier to introduce for bonus distributions than merit pay increases.

[Tony Bergmann-Porter]

Jim:

I go back almost as far as you, and the point and purpose of these position-in-range grids was to manage (over a VERY long time) everybody's pay to the grade midpoint which was, in turn, a proxy for "the market".

These technologies and methodologies belonged to a time in which people spent their entire working lives in large organizations with internal labor markets in an environment of government managed competition.

[E. James (Jim) Brennan]

Yeah, Tony. You probably remember (hearing about) the prehistoric days when the grids also contained variable time frames. Since annual increases did not become that common for unorganized employees until the crazy double-digit inflation years of the '70s, grids could specify 16 months between high C/R raises and "as little" as 10 or 12 months for the lowest-paid highest performers.

With the modern miniscule net closure trajectories, no one hired at even 85% C/R (which is higher than "the minimum" of the standard range) will ever progress to their midpoint before they quit, are transferred or promoted. Although most of the conditions have changed, we still limp along using the static tools designed for a different reality. Like 19th Century methods in the 21st Century.