Editor's Note: A better way to deliver merit increases than the "timeless" merit grid? Listen up as Jim Brennan makes his Classic case for a different approach.
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 an independent compensation advisor with extensive total rewards experience in most industries. After corporate HR posts and consulting CEO roles, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness in reasonable executive compensation court cases, Jim also serves on the Advisory Board of the Compensation and Benefits Review.
Image "Percent And Dollar Symbols" courtesy of renjish krishnan/FreeDigitalPhotos.net
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