There are seven basic merit allocation strategies, says Consultant Whitney Herrington. Compensation managers should be familiar with them all, including when they are appropriate (and when they are not).
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Herrington is senior associate consultant for Rewards and Executive Compensation at Hay Group in Jersey City, New Jersey. She delivered her tips at a recent BLR-sponsored webinar. Here are five of her seven alternatives:
Alternative #1: Uniform Adjustment
The individual employee’s base pay increase is based on a constant increase percentage (e.g., a cost of living adjustment). There are two common approaches in use:
- Midpoint adjustments that slow down the growth in pay for employees with relatively high salaries and more rapidly adjust the pay of employees with low salaries, and
- Actual base pay adjustments that take into account actual employee base pay.
Strengths of Alternative #1:
- Simple approach that is easy to communicate to employees
- Easy and quick to administer
- Diminishes chances for inappropriate adjustments by managers
Concerns with Alternative #1:
- No differentiation for individual employee performance
- Does not readily improve pay inequities
- Sends visible statement to employees that all efforts are equal
This is commonly used where performance can’t easily be assessed or in a situation where performance is mostly the same, says Herrington. An example is in a manufacturing situation where each person does his or her job on the assembly line. It also may be employed when the employer wants to do something, but there is only a small increase in the budget.
Alternative #2: Uniform and Discretionary Adjustment
With this alternative, says Herrington, solid performers and above receive an across-the-board base pay adjustment of X% (for example, 2%); a discretionary increase may also be channeled to the highest performing employees.
Strengths of Alternative #2:
- Overtly attempts to keep employees partially whole with the market
- Channels additional increase of dollars to high-performing employees
Concerns with Alternative #2:
- Across-the-board adjustments may be viewed as nominal.
- Approach still requires managers to assess the performance of employees.
- May be viewed as more subjective (because of less structure) than other alternatives.
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Alternative #3: Position in Range Adjustment
With Alternative #3, base pay increases are based on position in salary range only. Employees paid relatively low (i.e., base pay less than midpoint) receive greater increases than those paid relatively high (i.e., base pay greater than midpoint). The process features:
- Management discretion in adjustment (range around target)
Sample Increase Guide
|
Compa-Ratio |
80%–90% |
90%–100% |
100%–110% |
110%–120% |
|
Target |
5% |
4% |
3% |
2% |
|
Allowable Range |
4%-–6% |
3%–5% |
2%–4% |
0%–3% |
Strengths of Alternative #3:
- Process is based, in part, on objective measures (i.e., compa-ratio).
- Allows for management discretion in increase percentages.
Concerns with Alternative #3:
- Does not take into consideration employee performance.
- Allowable range in increase percentage may not fix pay inequities.
Alternative #4: Performance-Based Adjustment
With this alternative, base pay increases are based on performance assessment only. Employees with higher performance—regardless of current pay levels or pay relative to market—receive the greatest increases. Features are:
- Management discretion in adjustment (range around target), and
- Decision on basing increase percentage on midpoint or base salary.
Sample Increase Guide
|
Performance Rating |
1 |
2 |
3 |
4 |
5 |
|
Target |
0.5% |
1.5% |
3.0% |
3.5% |
4.5% |
|
Range |
0%–1% |
1%–2% |
2.5%–3.5% |
3%–4% |
4%–6% |
Strengths of Alternative #4:
- Fairly common marketplace practice.
- Process is based, in part, on objective measures (i.e., performance rating).
- Allows for management discretion in increase percentages.
Concerns with Alternative #4:
- Does not take into consideration position relative to market.
- Allowable range in increase percentage may not fix pay inequities.
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Alternative #5: Simplified Pay for Performance Grid
This is probably the most common approach, says Herrington. It incorporates both compa-ratio (market) and individual performance effectiveness in generating merit increases.
- At a given compa-ratio, the higher the effectiveness, the greater the increase
- At a given effectiveness level, the higher the compa-ratio, the smaller the increase
Sample Increase Guide
|
|
Position in Range |
|||||
|
|
Low |
|
|
|
|
High |
|
High |
5% |
|
4% |
4% |
|
3% |
|
|
|
3%–5% |
|
|
2%–4% |
|
|
Effectiveness |
4% |
|
3% |
3% |
|
2% |
|
|
4% |
|
|
|
|
2% |
|
|
|
2%–4% |
|
|
1%–3% |
|
|
Low |
3% |
|
2% |
2% |
|
1% |
Strengths of Alternative #5:
- Common marketplace practice.
- Performance is considered in making base pay adjustments; only competent-plus employees would be eligible for an increase.
Concerns with Alternative #5:
- Credibility of performance management program essential.
- Management discretion increases, opening the door for suspect adjustments.
In tomorrow’s Advisor, we present Alternatives #6 and #7, plus an introduction to the all-things-compensation website, Compensation.BLR.com®.