Lump O' Coal: Merit Pay Spreads For Stars vs. Roleplayers...

It's Christmastime.  Shopping. Church. The Grinch.  Also - Getting your merit matrix together so you can allocate your merit increase budget (if you are one of the many companies that does annual reviews on a calendar year cycle).

What should you pay your stars by way of merit increases?  Let the hand-wringing begin!  Let's get you warmed up with this from Darcy Dees from Compensation Cafe:

"It’s easy to test and see if you really do pay for performance by comparing the total remuneration package of your top performers to that of your average performers.  If an appreciable difference doesn’t exist, you might want to reconsider how you give your rewards out.  You may even be able to reallocate funds from lower performers to fund the rewards for your top performers.  If you do differentiate pay for top performers then you should communicate that to all of your employees to encourage more effort and better results from all employees who will believe they’ll be rewarded for those efforts."

Of course, that's too simple.  You know the drill on pay-for-performance (PFP).  You do your best to ingrain the PFP fundamentals into your culture, but here's the trick - to truly pay your best performers, you have to be tough on the folks who aren't cutting it.  Is your budgeted percentage for merit increases across your company/unit 3-4%? 

For most of us, 3-4% is the standard budgeted range.  And that's where the rub is.  To give your best performers a big pop and make them feel like the special people they are, you have to take it away from a low performer.  Most of your managers aren't prepared to sit down with the lowest performing person in their groups and tell them they are getting a 1% raise - or no raise at all....

Also, what's your definition of a big pop?  What's pay for performance really mean?  How big does the percentage have to be to make a favorable impression?

It's all psychology.  My take is that if you can get someone to a 10% merit increase, that should tell them they are a raving superstar.  Of course, that would double their pay in 10 years, so it has to be linked to real results.

What's your percentage related to an increase for a star who is meaningful? 5%?  8?

What's the equivalent of a lump of coal for a low performer? My guess is that managers still dole out 3%, across the board increases to low performers so often that a 1 or 2% increase would look harsh.  Your thoughts?

Merry freaking Christmas: Here's your 1% increase. 

Comments

[Chris]

Interesting...but why do the high performers have to get as high of an increase as 8 or 10%? Come on...we're in a recession here and people should feel lucky to even HAVE jobs. So you take it like this: "Times are tough right now" you set the stage..."however we value you as a high performing individual here" you turn it around..."and you know historically the company standard is ~3%" you explain..."but because your performance has exceeded expectations, we feel you deserve to be compensated to match the efforts of your performance" you build your case..."congratulations and enjoy this generous 4.5% increase!!" you deliver the message and convey a sense of reward. :)

Then to the scrubs you give them 2.75% and you can use the same "approx 3% increase" speech again next year!

Job well done! Go smoke yourself another fatcat cigar!

[survivor]

KD, I agree with you that stars should be appropriately rewarded if the company can afford to do so. A "walk-around 4.5%" isn't the solution. Now is the perfect time to reward your stars to hold onto them.

[Kathryn Carlson]

Managers need to be able to rank employees and those at the bottom get little to nothing and those at the top get more- do it any other way and you end up with a group of "average at best" employees. If you are just doing a performance review without ranking the employee against others in the same position on an objective numerical basis then you haven't really assessed performance.

[Nancy Hilpert]

While many managers would rather take the 'easy out' and even the pay curve, if your company is truly performance driven (and in the end, any public and/or for profit must be measured by numbers) does it really make business sense to shave off a few points of gain for top performers in order to diminish the grumble effect of the bottom quartilers? That seems to me to be a case of 'mortgaging tomorrow for today.'
Think about it this way: In two years its much more important that Topper remain at the company, then that you've still retained your bottom quartile, who you should have moved out by then. And yet, the behavior of spreading it around to everyone, regardless of merit, increases the chances that your Toppers leave (if even just to a better higher performing group within the company) and your Bottoms stay. In fact, managers who take the easy out b/c the want to avoid hurting people, or the awkward conversations are not only hurting their own careers (um, YOU won't be rated highly for being a wimpy manager) but they are irresponsible to their employer AND making their own jobs harder. If someone can't handle the truth (and if employers 'owe' anything to their people, it should be clear and objectively derived feedback on their contribution) then they have no business being in management and/or in business. I write from direct experience and having made the mistake myself when I was top grading a department of recruiters. Taking the 'give everyone a little bit' route earned me no loyalty--the low and mid tiers didn't pick up their performance and/or demonstrate more loyalty even though I'd fought to get them another 1-2%; and the top tiers were constantly at risk because their pay was not keeping pace with competitors. I would reverse the logic of Chris's comment about people being willing to take what they get in tough economic times: Bottom and mid-tier performers are easily replaced (especially in a recession) and will feel happy just to have a job knowing how hard it would be to find another. However, Toppers (the people who drive innovation and create the products and services that differentiate your company from the competition) are very hard to find and to get, and even in a recession, they can get higher paying jobs. In the end, which employee group is more important to the bottom line and growth of your company? I'd be betting my merit budget on those who are likely to keep my job safe by keeping my company at the leading edge of innovation and delivery.