The Hidden Pitfall in Merit Pay Increases

Merit increases can help target specific business goals, but as workers take one step forward to claim their reward, make sure they don’t take two steps back.

A recent Advisor report on the pay raises employers project for 2007 noted that merit increases for exempt employees will average 3.8 percent, compared with general increases for exempts, which will average 3.6 percent. Which basis for raising employee pay is more common … general increases or those based on merit?

If you said merit, you’re in agreement with about 6 of every 10 employers nationwide, report the editors of BLR’s Employee Compensation in [Your State] program, which gathers data yearly about key pay practices. Which method, however, is “better,” depends on your individual circumstances and point of view.

Not unexpectedly, unions overwhelmingly favor the general increase, as they view company performance as a total team effort, and in their view, awarding one employee a larger raise than another is “unfair” and inevitably undermines solidarity. They therefore insist that general raises be written into collective bargaining agreements.

Increases That Can Be Targeted

Management usually finds the merit system better suits its purposes. The reason: Increases can be specifically targeted at key business goals, in advance of the raise.

Depending on their function, workers are told that if they can increase sales, decrease waste, or speed up productivity to a specified level agreed on in advance, they can depend on the size of their raise. This discussion is usually held up to a year before the worker’s review date, with progress to goal measured on a monthly or even weekly basis.

Under this system, workers always know where they stand. And, if an extra push is called for, they know about it early enough to have the time to deliver it.

Unintended Consequences

While this may sound like a perfect system, it has a flaw. “By focusing on certain selected aspects of performance, you risk extinguishing behaviors that the employee may not find so useful in the quest for a bigger raise,” Employee Compensation editors warn. “Highly desirable routines can be abandoned in a flash when they begin to interfere with actions that make money for the actor.”

The Solution?

Involve employees in the process of deciding which aspects of performance to emphasize, say the editors. This lets you address all the critical factors of the job, and to create awareness that while some must improve to win the raise, the others cannot be shortchanged.

A Systematic Approach

The preceding discussion of merit vs. general raises comes from the section of the Employee Compensation in [Your State] program that’s titled, “A Systematic Approach to Wage and Salary Administration.” You can see the wide scope of coverage of this section by clicking on the View Table of Contents link below.

Of course, the decision of whether to adopt a general increase, merit increase, or combination system (perhaps including bonus or other variable pay elements) is just the first step in such a systematic approach. You need to apply this decision to the various pay grades in your company, and to then index your decisions against both your local cost of living and what your competitors are paying for similar jobs. Nationwide and cross-industry data usually don’t apply.

The Employee Compensation in [Your State] program fills these needs with localized data on hundreds of jobs, kept current through six updates a year. There’s a monthly compensation trends newsletter. And subscribers also receive three annual reports, on exempt and nonexempt compensation, and on benefits, which encapsulate the information gained in our annual research.

The program is available for you to try in your office, on your needs, for 30 days, with no cost or obligation to purchase. Click below for more information or to try it on a free trial basis.

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For more information on Employee Compensation in [Your State] or to try your state’s version of the program at no cost or risk, click here.