Small Merit Budget? Carve-Outs Let You Differentiate Performance

7. Make Merit Matter
[Go here for factors 1 to 6.]

Of course, one of the problems with merit pay has been that we’re mostly working with low merit budgets. But even with a small budget, you can differentiate merit for high performers.

“Carve Outs” from merit enable companies to differentiate rewards for high performers. Take a 3 percent budget. Carve out .5 percent for top performers. That means that you have a 2.5% average for average performers (75% of population), and a 4.5% average for high performers (25% of population).That’s pretty significant differentiation.

When 3 percent is the amount shown in the budget, and managers tell people, then everyone expects 3 percent or more! We box ourselves in, says Kochanski. One way to handle this is to put two lines in the budget.

8. Make Variable Vary

“Carve Outs” can also be applied to variable pay. For example, if you have a 20% bonus target, but business results push it to 22 percent, carve out 2 percent for high performers. That allows you to significantly differentiate incentives for high performers.

This is a communication issue and requires working with finance to get it into the budget.

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9. Tie Promotions to Performance

What Kochanski has found is that promotions are poorly managed. Budgeting for the cost seems to help. Promotions should be related to growth and turnover. If you’re promoting faster than that combination, you’re adding cost and making the organization top heavy.

You need to track and report across units, with calibration.
Certainly require several levels of approval, Kochanski says

For example take a look at these criteria and how they may affect compensation.

Charts like this can help your managers and supervisors stay within compensation guidelines, but how do you really know if they are following the rules? There’s only one way to find out what sort of compensation shenanigans are going on—regular audits.

Small increase budgets and carveouts—just two of the challenges on the compensation plate. “Maintain internal equity and external competitiveness and control turnover, but still meet management’s demands for lowered costs.” Heard that one before?  Many of the professionals we serve find helpful answers to all their compensation questions at Compensation.BLR.com, BLR’s comprehensive compensation website.

And there’s great news: The site has just been revamped in two important ways. First, compliance focus information has been updated to include the latest on COBRA, Lilly Ledbetter, and FMLA. Second, user features are enhanced to make the site even quicker to respond to your particular needs:

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