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04/20/2009

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Is it appropriate to call an increase a "merit" increase if the diffential between a top and average performer is only 0.2%? If companies don't have the appetite to withhold increases from average performers to provide a higher increase for the their top performers (and some won't since it's tough to alienate the biggest portion of your workforce who are steady contributors); then perhaps they should call it a "cost of living" increase and spread it evenly to everyone.

In discussing meaningful distinctions in pay to reinforce meaningful distinctions in performance, its imperative to consider both salary increases and lump sum payments. In last fall's WorldatWork's Salary Budget Survey it was reported that average merit increases were 3.9% and ranged from 3.6% for middle performers to 5.2% for high performers (a differernce of 1.6%). The report also said that average variable pay program payments were 12.6% for exempt employees. Seems to me that the salary increases alone aren't enough to make meaningful pay distinctions, but when combined with lump sum payments, they have a better chance of influencing behaviors.

Please, let's not re-debate the merits of "cost-of-living" increases. If anyone wants to read a recent article on the problems with CPI-based pay policies, check out this fall 2008 article on WorldatWork's workspan magazine: http://www.worldatwork.org/waw/adimLink?id=29395

Paul, please don't misunderstand me; I don't think that "cost of living" increases are the way to go. Most of us have seen increases spread out like peanut butter in the past, and that's my contention. Is it appropriate to call those types of increases "merit"?

I agree with your statement about incentive plans. I think those continue to be the strongest tool in a pay-for-performance environment.

Darcy, I agree that the point is to provide a meaningful merit increase, or just don't insinuate that it is performance or merit that you are paying for. Over a year ago, I updated my website to include a COMP101 section providing some basic instructions on how compensation varies in inflationary and recessionary times. My suggestion is two-fold: 1) consider making the increase an incentive (variable) increase (not added to base pay) or 2) if providing a merit increase, make the difference in average performance and outstanding performance meaningful (in my example: 5% difference).
See example:

http://www.compensationsolutions.us.com/compensation101.php?page=3

I know that it is a tough message to sell, but if we are really not differentiating on increase percent, we had best find some new name for it, because it is certainly not "pay for performance or merit."


Perhaps we should also build into our merit or PFP plans the communication to employees of the long term cost differences between apparently small differences in base salary increases.

For example, a 1.6% difference in a merit pay increase between two people at $50,000 would be over $5,000 if spread over 5 years and included the roll-up costs of benefits. This is not just smoke and mirrors; but real costs to an employer.

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