Where’s the Merit in Merit Pay?

I’m a fan of Ann Bares’ Compensation Force blog. She writes cleanly and clearly on what are often complex topics. She’s called herself a “spreadsheet jockey,” but she is uniquely talented at taking the information out of a spreadsheet and bringing to light the most pressing issues to those not immersed in employee compensation matters.

Last month, she broke down the challenge of merit pay. Click over and you’ll see at a quick glance why she concludes:

“There we have it, for what it's worth. All I can say is, no wonder we're looking beyond merit pay, and even cash rewards, to drive performance.”

A Workspan magazine article (“Does Merit Pay Still Have Merit in the New Economic Reality?”, access requires subscription) earlier this month really brought home the challenges of merit pay today. As the article points out, the practice of merit pay began in the 1970s when merit budgets where 6-8%, not today’s much lower 2-3% that must be divided up between all employees. Why are we still relying on a tool created 30 years ago in a much different economic and workplace reality?

Equally important, the article points out:

“Note, too, that merit pay in its current form is often the primary (and sometimes the only) vehicle that organizations use to pay for performance, and therefore, their only formal way to recognize good performers.”

That’s the critical problem rarely acknowledged – companies must diversify their forms of recognition. Think of recognition like cooking your favorite recipe. You typically include five spices to make the dish just so. Think how different – and how bland – that dish would taste if you only used one spice. The same is true in organizations with bland programs that use only one form of recognition: the review.

In many organizations, the performance review and subsequent promotion or raise is the only form of recognition employees receive for their hard work. Strategic recognition eliminates this narrow “recognition platform,” creating continuous positive feedback “events” that recognize employee accomplishments, show appreciation for efforts that advance critical projects, and reward mastery.

With merit pay practices effectively dying out on their own, what are you planning to do to replace them? How are you diversifying your recognition practices?