Why You Got Shafted on Your Merit Increase…

Sean Conrad Compensation/Cash Money, Performance

It’s that time of year. Performance reviews. Comp adjustments. Fear and loathing for so many. It got me thinking about the problems that show up in the merit increase process, and how they often have a deeper cause.

Darcy Dees does a nice job of covering the definition of the topic in her November post over at Compensation Cafe.  I don’t really need to tell you that there are several approaches to the subject of pay for performance.  Best practices wouldMo money say that there are multiple factors that impact pay for performance – upgrading skill levels, company and departmental performance, team goals, etc.  In this post, I’m only talking about the merit based portion of an overall pay for performance program, specifically, using overall appraisal scores to drive merit increases.

Why?  Because that’s the reality of what many organizations are using as the foundation for their pay for performance program.  When that happens and the scenario below unfolds, you’d better believe the problem isn’t with your merit increase program, but with the performance management process.

Here’s the scenario.  Your company has been doing fine despite the economy, and you’re running a P4P program that’s based on merit increases. The employees are aware that pay increases are supposed to be linked to performance.  In their minds, the annual review is the basis.

Now, what do you do about Richard?  According to his performance history, he’s a very solid performer.  Appraisal data shows 4/5s across the board for the last three years.  No concerns raised by his manager logged anywhere.  But Richard is sitting across from you, pretty vocal about the fact that he got shafted on his raise: 1.5% – the same as everyone else.  There may be a reasonable explanation, but most of the time there isn’t, and there really is a gap.  Based on the data, you are inclined to agree with him.

Herein lies the problem in this all too common scenario: if you don’t actually do the performance management part, the “merit based pay” doesn’t work. Shocker, I know.

So what happened?  Why did Richard get a good review, but get royally….overlooked when it came time for the raise?  One of three things happened here:

Explanation 1. The manager was assigning merit increases based on their own personal preferences/mood that day.  A pretty subjective approach, with no link to performance and more akin to playing favorites.

Explanation 2. The manager doesn’t like the pressure of assigning increases and decided to split the pot evenly across the team – Richard got what everyone else got.  That’s not pay for performance either, unless of course all team members are equal performers.  And we all know how often THAT happens in real life.  So if you are going to let managers evenly spread their raises, that’s cool, just stop calling it pay for performance. It’s not even close.

Explanation 3. Richard isn’t really a super high performer and shouldn’t have earned 4/5 on his review to begin with. But his manager was too weak to let him know that he was average, leading to grade creep in the appraisal process and a major disconnect on his raise.

So the manager was unwilling to deal with performance, but when Richard gets his next check he’s going to come to HR and dump the problem in your lap.  When this all blows up, the merit increase process gets blamed.  But where was the problem really?

  1. The first failure was the manager not dealing with performance all year long with regular feedback and coaching.
  2. The second was not addressing performance issues honestly and objectively in the appraisal process. Yup, still not willing to have tough conversations.
  3. Managers up the approval chain in the appraisal process weren’t doing their jobs. They didn’t read it, or if they did, they just rubber stamped it.

Richard ends up with a raw deal not only on his merit increase, but when it comes to development and feedback too.  He’s not a mind reader, but he’s being told in one instance “you’re 4/5″ and in another…..”you are not really that great, and we won’t tell you why.”  Nice, shaft the guy when it really counts and don’t bother to help him improve or grow.

Cue the broken record, but I’ve said it at least a million times to anyone who will listen, performance management is not a once a year deal. It needs to be a day-to-day priority.  If a manager isn’t plugged in with their employees and truly coaching them and dealing with issues immediately, there’s no way that any performance appraisal reflects reality, or that the employee is going to understand, let alone happily accept their merit increase.

The end result is that your employees get the short end. I’m positive I don’t need to tell you that does zilch for employee engagement or retention or establishing a culture that strives for high performance.  But these factors were pretty much the rationale for implementing a pay for performance program in the first place – right?

Issues in P4P are often like diagnosing an illness – you can’t stop at the symptom, you need to work out the cause and treat it. You have to be bold enough, and brave enough to tackle this beast and fight for the integrity of your talent management programs.

You up for it?


Editor’s Note  Don’t Feed the Vendors is a new series at FOT.  The goal of the DFTV series?  We get hammered by third parties who want to write at FOT, so we give them a challenge.  Write something cool and significant we can learn from/talk about in the FOT style, and you can roll with the FOT crew.  Try to sell our readership your product and/or provide a whitepaper, and we’ll openly mock your company in public for not understanding the DNA of our readership.  Many inquire, few follow through once they learn they can’t post a workup of their latest “research”.  For those that make the cut, we’ll offer up associate FOT membership as part of the Don’t Feed the Vendors stable.

Sean Conrad of Halogen Software is one of the ones that made the cut.  Show him some love in the comments for being up to the challenge and not writing something that should be read on PBS.