Merit increases- good people get more.
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I know that your pay system isn’t as good as it should be, because:
It’s more reactionary than you’d like,
You pay less than you’d like,
Good people do, or might, leave because we underpay them,
And/or because they are really good, and others in the market will tempt them with more.
If you could just get your pay system a little better, a little smarter, it would help a lot. But how to stop just running around putting out fires?
Merit pay increases
What is a merit increase? It’s an extra pay increase ON TOP OF the annual cost-of-living increase, that gives the person more money, because they are worth more. It’s a raise. It’s giving people more money based on their merit, and their merit is based on their performance to the company’s needs.
Why we give them
By comparing them to the average. This is either because:
Compared to the average rate for their job, they are underpaid.
Compared to the average performance, they are better.
This can be both- and yes, if both apply, you need to jump on that straight away.
How to give them
Many, most, (maybe even practically every) formal salary reviews has some element of merit, some additional component above the cost-of-living increase for some employees to reward their contribution and to secure their ongoing engagement and retention. I recognise that sometimes increases don’t happen; sometimes financial or economic hardship leads organisation to decide not to give pay increases a) above the determined cost of living increase or b)at all.
These happen, and sometimes happen often, but even if they happen often, very few organisations larger than a handful of employee have a deliberate strategy to never give pay increases other than a universal increase.
Below the average pay-market rate adjustment
Pay can be increased because the employee is being underpaid. This doesn’t instinctively fit our criteria of merit (for being good), but it does if you think about it (and we do it in the same process anyway). An increase that gets people up to average is recognising that they are average, that they are of normal merit, that they deserve the going rate. Paying less suggests they are less than the average, and (more importantly) ignoring that another company will likely pay them the average, the going rate.
How to do this? First you need data, good rem data. I can’t point this out to you who- there are many, many providers across every country. But what you need is some way to knowing (or approximating), how much is the average pay, so you can determine where your people are in comparison.
Performance assessment
So if we are going to pay good people more, how do we tell if they are good? It’s really hard to do if you have no system or process to assess performance. So you really need to make sure that managers are doing these, and doing them well.
Most of the time, employees performance rating are grouped, and often fall into a normal bell-shaped distribution. Each system has their own iterations, but most I’ve seen generally group into these categories- poor, fine, good, star performers. Poor employees often get no increase (not even cost of living), fine= get just cost of living, good= a small increase, stars= a larger increase.
It is important to mention three key questions that need to be answered, that fall to HR to ask and check.
Are the assessments fair? Some jobs are easier to quantify than others, and some situations are easier to do well in than others. Whenever we see one salesperson smashing their targets easily, we do need to ask if a) the targets are too easy, and/or b) do they have a very easy region, where the product sells itself. Alternatively (and if this is more common), are people being rated poorly because the measures and/or the environment is an uphill struggle. If so, are we handing out pay increases fairly?
Have managers been fair with their team? We implicitly trust managers not to be biased, but cognitive biases happen easily and often. Confirmation biases (such the halo effect, implicit bais, affinity bias to name just a few) can easily occur when making subjective assessment of employees, without the knowledge or intention of the assessing manager. Sometimes HR need to act as a double-check on this.
Has it been fair across departments? Does one department hand out gold stars more readily than others? If so, has that department had an exceptional year? Its not uncommon, because one person’s good is another person’s exceptional. Often calibration across teams is necessary, especially when pay increases are a contestable scarcity.
The merit increase: small but forever
So let’s talk about the common outcome of most merit increase, a 1-2% pay increase above the cost-of-living increase. Hardly cause for champagne. Often merit pay increases are accepted, but rarely celebrated. 1.05% increase after a busy and difficult year is not hugely appreciated, so the temptation is to dig deeper into the pocket.
The counterpoint is that unlike bonuses, merit increases are forever- well, until they leave. Ideally, a complex remuneration system would have the mechanisms to reward current efforts through a bonus, but these aren’t common. It’s not uncommon to find employees on higher salaries due to past performance, which is not reflected in their current value; often the highest-paid person in a band isn’t the best performer, but was the best performer. For the HR practitioner, it important to balance the immediate needs to entice the employee to stay, while avoiding perpetually rewarding past glories.
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