Paying it Forward: Ideas Beyond the Traditional Merit Matrix

Amid the many uncertainties of the recovering economy, one yet-to-be-answered question is how - exactly - pay mix and management will be different going forward.

The recession and its accompanying cost pressures have forced employers to stretch beyond base salary increases in exploring ways to motivate and reward employees.  Many organizations have used the downturn as an opportunity to relook and reset their pay strategies, often putting new or renewed emphasis on variable and performance-based pay.  Experts question whether base salary growth will return to its pre-recession levels.  And with agility and responsiveness rising in the list of critical organizational attributes, creating an element of flexibility in reward design and cost structure is becoming an imperative.

So where does this leave merit pay, as we've traditionally practiced it, along with the ubiquitous merit matrix?

Interesting discussions and fits of experimentation are going on around how best to manage investment in base salaries going forward.  New ideas and formats tend to be more multi-dimensional and more forward thinking than historical practice, which has focused primarily on rewarding past performance.

One particular thread that intrigues me is the idea of focusing on two dimensions - demonstrated performance in current role (past looking) and potential to contribute over the longer-term (forward looking) - and rewards with a tailored combination of base salary increases and cash bonuses.  In my head, this takes the shape of a matrix which looks something like the following:

 
  
Of course, the southeast corner (highest on both dimensions) would reflect the highest level of reward and the northwest corner, the lowest.  Progress along the "potential" continuum would be rewarded with a combination featuring a proportionately stronger focus on base salary adjustment, while progress along the "performance in current role" continuum would be rewarded by a combination emphasizing the one-time cash bonus.  So investment in fixed costs - salary adjustments - would be directed toward an investment in the skills and capabilities the organization believes are critical to future growth and prosperity.  Results in current role would be reinforced with a one-time award.

Of course, all of this hangs on the organization's ability to not only define and measure current performance - no small thing, as we know - but also foresee the kinds of talent it will require going forward and measure the degree to which these capabilities exist among current staff.

And an element of market or midpoint control will surely need to play a role as well.

Just one thought about one path we might follow. Many of you are already taking steps beyond the merit matrix in your organizations - would love to hear your ideas and experiences here!

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys reading in her spare time.  Follow her on Twitter at @annbares.
  

Comments

[Murray Wilson]

I believe that you've got your directions reversed, Ann. Lowest is NW and highest is SE.

[Ann Bares]

Murray:

Doggone it, I believe you're right. This isn't the first time it's been apparent that the editor could use her own editor. Fixed it. Thanks!!

[E. James (Jim) Brennan]

What you describe is both technically sound and conceptually exactly what everyone was SUPPOSED to have been doing for decades, Ann. Short-term immediately-past contributions are rewarded by fixed amounts that must be re-earned (like, what have you done for me LATELY?) while accumulated value accrued over time which continues to build and compound (think, "vital skill or competency") gets a base raise. It's parallel to typical executive bonus/incentive logic, where time-specific past results are rewarded via lump sums instantly amortized but sustained retention of the mission-critical skills (KSAs) or competencies has a compounded value, especially when it involves irreplaceable institutional memory.

[Vita Taylor]

Elegant, concise and operational...
Thanks, Ann!

[Murray Wilson]

Ann,

I don't think that you have made it clear, at least to me, what you mean by potential to contribute. Do you mean base pay increases based on skills and competencies that will help organizations in the future? If so, are you an advocate of skill/competency-based pay?

P.S. I wish that I had your track record for accurate posts in my work.

Murray

[Paul Hebert]

This is great.

It does speak to the fact that in order to accurately evaluate the future value of our HR investments (the base salary if I understand the post)managers must have some idea of what skill sets will be needed in the future. This would then require that a company spend time and energy on more accurate scenario planning in order to determine the appropriate investment in their resource. No different than evaluating a software or a production machine that will be in service for 4, 5 or even 10 years.

How many managers - at any level in the organization - spend any time thinking about the HR needs 4, 5 or 10 years down the road? Too often it is about the resource needs 4, 5, 10 minutes into the future.

My question is how do we link this great thinking to performance evaluations, training, company vision, etc?

In my mind, any company that adopts this method of allocating resources would almost be FORCED to put more effort into future planning - something we'd all love to see I think.

Another question that grabs me is - what if the future is different than we think? What if the investment in the base salary becomes moot due to market changes unforeseen by the company? How do you manage someone who two years ago was extremely valuable based on the future view then - and now is less valuable? I think of programmers as an example - 10 years ago we probably wouldn't have thought those with HTML skills would be as valuable as they are today versus those that could code in mainframe languages.

Or am I missing the point?

[Ann Bares]

Jim and Vita:

Thanks for affirmation of the direction - and for the comments.

Murray:

I have, at least somewhat purposefully, left the concept "potential to contribute" undefined, at least specifically. As Paul notes in his thoughts above, I think it is up to the organization to articulate what this is, in line with its vision of the future. What I have in mind, though, is broader than what most of us traditionally think of as skill-based pay (i.e., you develop and get certified for skill X, and you get Y dollars...). I see "potential to contribute" to the organization over the longer-term something that includes mission-critical skills, but also encompasses a deeo personal commitment to growth and development, leadership potential, and other behaviors and attributes that are seen to be aligned with the culture and values key to driving the place forward.

Paul:

Completely agreed - this does put the onus on the organization, and HR, to think strategically about future talent needs. In my mind, and per my response to Murray above, I think it goes beyond a specific set of hard skills (although it certainly includes that) to encompass the kind of "can do" attitude, behaviors and role modelship that the organization can depend on to help it navigate uncertainty and churn - beyond a specific functional discipline or skill set.

Make sense? Or am I leaving too much wiggle room in the concept to make it truly operational?