If recent research is right and prevalence is any indicator, merit pay is still riding high ... for now. The question is, for how long?
Hewitt Associates has an outstanding presentation online from its recent webcast series (you can also replay the webcast in its entirety here) assessing the aftermath of the recession on compensation spending.
A few particularly notable facts from that presentation are worth pointing out and reflecting on here:
- Base salary increases are still the most popular approach for rewarding performance (95% of research respondents), but variable pay may be coming in close behind (70%).
- Most organizations (52%) rate themselves as only "moderately successful" in differentiating pay based on performance, 26% as "minimally successful".
- More than half (60%) are taking no action to increase pay differentiation in merit increases.
- Less than 30% are training managers on differentiating performance.
It is clear that we continue to experience only limited success in using salary increases to reward performance. And while the recession has driven some employers to sharpen their performance differentiation teeth, it has led others to temporarily abandon all efforts in this regard.
It is for this reason that a number of experts, including Hewitt's own Ken Abosch, took a stand at last summer's WorldatWork conference and predicted that the future of paying for performance would lie with variable pay. Given the evidence here, it is difficult to argue with that conclusion. Unfortunately, this does not get us off the hook for base pay management ... or even merit pay.
To the extent that ...
(a) the purchase price of talent in the market will grow (and it will)
and that
(b) the pace of that growth will be quicker for talent with critical skills and proven performance results (and it will be)
...the problem of managing our investment in base salaries will be with us - in some shape or form - for the foreseeable future.
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