Is It Time to Agree That Merit Increases Have Run Their Course?

Surveys show that salary increases will be in the 3 percent range for 2011. (Photo by Dreamstime)

It’s that time of year! You can feel it in the air. The anticipation … the preparation … the dread.

No, not the coming of Spring. The annual performance review.

Many companies target the March/April time frame for conducting the reviews and handing out merit increases. Except, of course, for those who choose to disassociate the review from the pay increase in an effort to communicate to employees that the review itself has nothing to do with raises.

(This is futile, by the way. Everyone knows their raise is dependent on the review in some fashion.)

A closer look at merit increases

Too many employees (and managers, for that matter) muddle through the performance review process simply to get to the merit increase possibility on the other side. But how relevant is that increase in today’s workforce?

Merit increases remain stagnant at about 3 percent (not much better than cost of living), and companies continue to sit on record profits, choosing to maintain and increase margins rather than hire or increase wages.

Fellow TLNT contributor Ann Bares, editor of Compensation Café and author of the Compensation Force blog, recently dug into this more, asking:

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There are rumblings underfoot among compensation and HR professionals concerning the once sacrosanct annual merit increase and whether the time may have come to (really) shake things up.

Should we be moving away from the one-size-fits-all, same-for-(nearly) every-employee merit matrix to something more differentiated, more strategic?  Is it time to reconsider the ‘once each year’ timing and look at other, particularly longer, alternatives?  Should we finally get serious about shifting some portion of this annual increase in fixed base over to some sort of variable opportunity?”

Really, they’re cost of living increases

Ann is running a brief survey on just this topic, and I’m very interested in the findings. Long-time readers know I am not an advocate of the annual cash bonus (as it quickly becomes an expected part of compensation), and merit increases no longer hold enough differentiation to matter (low performers get 2.3 percent, mid performers get 2.5-2.7 percent, high performers get 3.0 percent).

We might as well be honest and call these “merit” increases what they really are – cost of living increases – and turn to new ways appropriately recognize and reward those who go above and beyond. And we should do so in a frequent, timely and specific way, instead of reserving our praise and appreciation for the annual review or annual bonus.

What do you think about Ann’s questions? Has the merit increase run its course?

You can find more from Derek Irvine on his Recognize This! blog.

Derek Irvine is one of the world’s foremost experts on employee recognition and engagement, helping business leaders set a higher vision and ambition for their company culture. As the Vice President of Client Strategy and Consulting at Globoforce, Derek helps clients — including some of world’s most admired companies such as Proctor and Gamble, Intuit, KPMG, and Thomson Reuters — leverage recognition strategies and best practices to better manage company culture, elevate employee engagement, increase retention, and improve the bottom line. He's also a renowned speaker and co-author of Winning with a Culture of Recognition. Contact him at irvine@globoforce.com.

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4 Comments on “Is It Time to Agree That Merit Increases Have Run Their Course?

  1. Yes, merit increase have run their course. At my current employer, private, most employees get the exact merit increases you write about. Only one or two employee exceed those numbers in each division. Of course, executives exceed those numbers, a few by 25%.
    In the case of state government, merit is supposed to be tied directly to the performance review, along with a set percentage increase. However, in the last 6+ year, the state has not funded merit, so, the incentive to perform is removed.
    It’s only a small part of the overall compensation issue. When you remove compensation from those that see the hard work and dedication an employee provides, and give that compensation decision to the accountants, this is what you end up with.
    The auto industry quickly came to learn they had to remove the ‘bean counters’ from their R&D and design departments as that methodology almost ran the auto industry into the ground.

  2. I’m not convinced that true merit increase programs have run their course. Merit is defined as “reward or punishment due” and “the qualities or actions that constitute the basis of one’s deserts”. I think it’s imperative to keep that in mind as a baseline.
    In answer to your question, yes, I very much like the questions Ann poses because they actually bring us back to performance based (aka merit), compensation planning. I like longer term incentives, I like clearly linking performance to increased compensation.

    The struggle, as always, is in the execution. So long as leaders/managers abdicate their responsibilities in developing their people and having honest conversations about performance, then we will see the peanut butter comp execution (mislabled as “merit”) continue. The problem isn’t with the 3% budget, per se. After all, there are financial constraints involved in runnning a business. Yes, we can argue whether or not (I say not), this 3% budget number is adequate, let alone effective. But that is a separate issue from HOW we deliver performance based compensation.

    Everyone should clearly understand how their performance is tied to any future increases in pay – either in base or in bonus. It must be crystal clear that bonus money is 1) not a guarantee, and 2) directly related to superior performance above and beyond the expectations of your role. It is “at risk” reward – if you don’t invest the risk by going above and beyond, you don’t reap the reward. Now, employees need to know what above and beyond looks like (and so do their managers) in order to help people get their. After all, loading copy paper when the machine runs out might not be in my “role profile” or job description, but do I really deserve a bonus for doing that?

    Before I completely turn this comment into a position paper, let me say that merit based compensation is effective when well executed and damaging when poorly executed. Just like any other aspect of managing the development and performance of people in an organization.

  3. When an employee does a great job, truely adding to the organization in a positive way, then that effort getting recognized by management goes much further than just that one person.This is not a new concept, its a forgotten one. Merit has equaled cost of living for over 10 years now to most employees. Which equals a Thank you, and not alot more. By giving everyone an annual Merit, the bright minds in many cases move on to greener pastures. Im in no way saying that leaves “bad” employees, Im simply saying the driven ones usually move on. When management takes a few ques from parenting 101, and gets back to the bare bones of business then we will see bigger and better come to life again. If an employee rocks a project, brings in a big account or saves the company money by a big process idea – pay them. Not in week, not at an annual review..but the minute management understands the good dead. (Same thing if a negative, address it asap) This will ignite the employee, it will give new incentive to co workers and once word gets out, it will bring in new talent all on its own. I dont take credit for the idea, only for reminding management…that the employees like bonus checks..just as much as you do……

  4. From the Employee’s perspective – I’ve read several articles on this topic – p4p vs. merit increase. What I do not see mentioned is the aspect of the value of my labor and the buying power of my $$$ earned diminishing.
    Say, someone negotiated to sell their skills/experience/talent for $70,000 in year 1. Assume the employee performs at mid-level – acceptable, solid performer but not outstanding. Still meets and contributes to company goals.
    But will not receive a performance increase because they were not “outstanding”. In year 3, assuming 3% inflation per year (and we all know it’s much higher than that), the employee is selling their skill/experience/talent for $65,863 in real value. No?
    While I totally understand and agree with that one should strive for stellar performance, I’m conflicted with the thought that for normal performance one should accept the devaluation of the worth of their time/labor.
    Stephanie mentions “risk of ever-increasing costs of labor” – I see that as cost of inflation. With the same token, companies usually increase their cost of goods as well. My experience with some corporations is that while they increase their margin/profit, the difference saved on labor cost goes to the top executives’ pockets. Not to mention the Shareholders’ pockets in case of a public company. How much stellar performance those shareholders put in to grow the company???
    I would like to hear opinions on this. thanks!

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