Does Your Organization Really Pay for Performance?
I’ve worked with hundreds of organizations for more than thirty years on pay issues. For-profits, non-profits, start-ups, middle market companies, and multinational corporations are all in my experience base.
Most organizations subscribe to the idea of paying for performance. They go through the annual merit increase exercise and they parse out their budget as best they can while typically not doing much to leverage their salary budget increase dollars to pay top performers notably more than their average performers.
When top performers receive an annual merit increase of 4%, for instance, and average performers receive an increase of 3%, the message to the top performers is, “Don’t break your back hustling around here because your efforts won’t be reflected in your annual salary increase.”
What is a budget constrained organization to do?
Here’s an example of what I think is a potential way to spread scare salary budget dollars, assuming a 3.5% merit budget:
Assuming a rating scale of 1 – 5, with 5 being highest, here’s a potential structure:
Rating Merit Increase Percent
1 zero
2 zero
3 3%
4 5%
5 7.5%
Some organizations utilize a structure like the above and include the ability to pay those lower in their salary range a higher merit increase, and those higher in their range alower increase, informed by their performance rating.
Behind the success of a structure like this lies some assumptions:
Managers have been trained regarding what various levels of performance look like.
Human Resources Management or other leadership in the company review all performance reviews and ratings before they are presented to employees. This review is conducted to watch for rater-bias (high or low) on the part of supervisors, and to ensure that performance is rated as uniformly as possible across the organization.
Most people in the organization are rated “3” on a 5 level scale. A small percentage are rated “4” and very few, if any, are rated “5”. Those who are rated “2” are on a Performance Improvement Plan and need to improve their performance in order to maintain their employment. Those rated a “1” are on their way out the door.
Stepping way back from the numbers, it is important to recognize that in great cultures people receive regular feedback from their manager and are given support and encouragement to improve in the areas where their job performance is weak. When it’s time for the annual review, it’s all old news since the manager has been giving feedback all year to their direct reports.
At Conover Consulting we have guided hundreds of organizations regarding merit increase strategies for decades. Reach out to us at laura@conoverconsulting.com if you would like assistance working through your merit pay process.
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