Merit Pay Doesn’t Work

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    I have written multiple times about how he hated performance reviews. This dreaded ritual in many companies is also often tied to the annual salary increase. An increase that oftentimes is given within a tight budget constraint somewhere between 2-4%. It is also often called a merit increase or a pay-for-performance compensation system. Those who are top performers may get a 4% increase while the poor performers may get a 2-3% increase. The result of this system actually keeps employees at very close salaries. My guess is that if the top performer in a particular position or team has a little less tenure than the bottom performer, the bottom performer could still make more money.

    How exactly is that pay for performance?

    Dow Scott, PhD, compensation consultant and professor of human resources in the Quinlan School of Business at Loyola University discusses this very topic in a recent article. According to Scott, these systems are outdated. (I absolutely agree!). He lists a number of reasons including the minimal range of the raises, supervisors rating employees similarly, and increases in salary that do not always align with business performance. His suggestion is base pay adjustments that are market-driven. He further suggests that rewarding performance can still occur through other reward systems and these systems.

    So how do you get there?

    Scott provides a few thoughts on this as well. He suggests that you start by convincing managers and employees that merit pay is not the answer. I personally think this won’t be too difficult since most employees already realize this. Another suggestion is to replace it with short and long-term incentives that are tied to performance goals. This is sometimes one of the most difficult, but it is the definition of pay for performance. He also mentions how little resistance organizations will have with the new system. I couldn’t agree more. As mentioned before, employees already know the system doesn’t work.

    What do you think?

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