Do You Have a Meretricious Merit Program?

That raise doesn’t mean what you think it means! Employees keep hearing how great our economy is performing. Jobless rates are at near all-time lows. Talent acquisition professionals are wailing about the availability of great talent. While all of this is happening, we are once again seeing predictions that annual merit budgets will be around 3%.

Merit: the quality of being particularly good or worthy, especially so as to deserve praise or reward; Synonyms:  excellence, goodness, standard, quality, level, grade, high quality, caliber, worth, good

…and the similar sounding, but far different,

Meretricious: apparently attractive but having, in reality, no value or integrity.  Synonyms: flashy, pretentious, gaudy, tawdry, trashy, garish, chintzy, loud, tinselly, cheap, tasteless

The arguments for 3% increases are strong and clear.

1. Inflation has been lower than 3% for several years (it’s currently around 2%).
2. Employee Engagement scores have remained steady.
3. Employee retention is generally strong.
4. Automation and efficiency have increased productivity enough to make up for slightly less enthusiastic performers.
5. Everyone else is doing it.

The arguments against are also strong, but a bit squishier.

Let’s be honest. The optics aren’t great! Does an increase that beats inflation by 1% resonate with any of the synonyms of the word “merit”? On the bright side, this nominal level increase also doesn’t scream “meretricious.” It kind of communicates disinterest or unimportance. In a world where companies regularly claim their “employees are their greatest asset” the term 3% Merit Budget seems a bit flaccid.

“But we’ve increased our incentive compensation budget!”, insists the crowd of executives and compensation professionals. While in concept this may be true, in reality, this is often where meretricious raises its painted face. Too often our cash incentive programs do not payout rationally and in line with performance. This happens when metrics are selected, and goals are set, with too much hope and not enough tactical expertise. The chances of someone being paid “target” are lower than they are led to believe. As my cowboy nephews might say, the plans end up being “all hat, no cattle.” The result is a lot of expectation and a lot of disappointment (or a seemingly random reward).

Equity programs can be even more troublesome. They are usually designed and executed as if each company looked and acted very much like every other company. Imagine if your sales compensation looked the same as sales compensation for an entirely different industry. This is the case for most equity compensation. When you add poor communication programs to the mix, we shouldn’t be surprised that most people have a hard time understanding the value of their equity or even the reason it was given to them.

So, what should you do?

1. Instead of following common practices, find or create best. The middle of market data is an unlikely place the find the “best” anything.
2. Make sure your CEO understands and passionately supports your approach to pay. Without this, even the best plans will fail. With this support, even average programs can be successful.
3. Be honest with your employees. Don’t sell what you can’t give. This means designing budgets and plans that are realistically achievable. It also means communicating something in addition to the best case scenario.
4. Consider doing something bold. In a world of 3% budgets consider 5% in a great year.

The trend of 3% increases will only be broken when a few successful brand-name companies do something different. Until then, doing something different is your competitive differentiator. You don’t have to tell anyone except your employees, and they will love you for it.

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is also a leading expert on equity compensation issues and has written several industry resources including the one-of-a-kind Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.

Comments

[Joe Thompson]

Dan,

Thanks for the post. It's always fun to be introduced to a new and useful word!

I've wondered about the "Everyone else is doing it" aspect of salary planning. We go out, see what level of salary increase has been forecast by our favorite collection of compensation "Carnacs" - and then apply it to our programs. It becomes a self-fulfilling prophesy.

If all of the major purveyors of pay prognostications came out and said, "For 2020, the average salary increase will be 5%," would we actually see 5% budgets? Have the forecasts themselves become part of the problem of low wage growth?

It makes me wonder how we would set our salary increases if those forecasts weren't available to us?

Your challenge to us all to "find or create best" resonates (and it sounds like it should be the title of a book!). It is as aspirational as it is inspirational!

Thanks for the reminder, Dan!