Yesterday’s Advisor featured the first 5 of Consultant Whitney Herrington’s 7 alternatives for deciding on merit pay. Today, alternatives #6 and #7.
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Alternative #6: Pay for Performance Matrix with Maximum Penetration Targets
This alternative also incorporates both compa-ratio (i.e., salary relative to salary midpoint) and performance in generating merit increases; however, it incorporates the notion of maximum penetration targets (MPT).
- MPT is the “maximum” salary per performance effectiveness level.
- Channels base salary increases to those employees below MPTs.
- Allows for lump sums to be paid to employees above MPTs.
Strengths of Alternative #6:
- More directly channels increase dollars to low paid, high performing employees
- Tempers size of increases to highly paid, low performing employees
- Allows for zero increase and lump sum increases
Concerns with Alternative #6:
- Performance management system must be credible, and
- Employees may not value lump sums as positively as base pay increases.
Below is Herrington’s example of a salary increase guide that incorporates performance and position in range and is designed to pay out approximately 4% to 5% (based on assumed performance and salary distributions).
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|
Position In Salary Range (Compa-Ratio) |
|||
|
Overall Performance |
80%–90% |
90%–100% |
100%–110% |
110%–120% |
|
Exceeds Expectations |
8%–10% |
7%–9% |
6%–8% |
5%–7% |
|
Meets Expectations |
5%–7% |
4%–6% |
3%–5% |
2%–4% |
|
Needs Improvement |
0%–5% |
0%–4% |
0%–3% |
0%–2% |
|
Unsatisfactory |
0% |
0% |
0% |
0% |
Note:
1. Managers have the latitude to provide adjustments within the range of increases noted within the cell. However, total increases must be within department budget guidelines.
2. High performers well above midpoint may receive a lump sum payment (a separate, onetime check).
3. The matrix is designed to pay out approximately 4%.
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Alternative #5/6b: Additional Pay for Performance Grid
This alternative is the same concept as the two previous alternatives, but it does not use a two-dimensional matrix. It decouples the market and performance components of the increase adjustment, Herrington says.
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Range Position |
% increase |
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Individual Value |
% Increase |
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|
At or above market target |
0% |
+ |
High |
5%–8% |
= |
Annual increase |
|
Below market target |
2%–3% |
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Competent |
3%–4% |
|
|
|
|
|
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Below expectations |
0% |
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Strengths of Alternative #5/6b:
- A decoupling of market-based increases for employees over market target
- A more performance-based orientation for increase while also incorporating position relative to market
Concerns with Alternative #5/6b:
- Credibility of performance management program is essential.
- Management discretion increases, opening the door for suspect adjustments.
Alternative #7: Full Management Discretion
With this alternative, Herrington says, managers have full discretion to make base pay adjustments within their allocated budget, although there are often some guidelines.
Strengths of Alternative #7:
- Somewhat fits the characteristics of the desired time-based work culture
- Empowers managers to make the right decisions to run their businesses
- Allows for greater management flexibility in making pay decisions
- Places accountability for pay decisions with managers
Concerns with Alternative #7:
- Potentially exposes organization to inconsistent pay practices
- May not provide the direction or necessary tools some managers need or want in matters of pay
- May create inequitable pay practices because of subjectivity of process (not all managers would use the same criteria for making base pay adjustments)
- Creates significant amount of work for the compensation department to test appropriateness of pay decisions
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