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Two experts debate the issue.
The key word here is “sustained.” Merit increases might have a temporary positive effect on performance, but it typically does not last long enough to make a true difference.
For example, consider the following: According to a recent WorldatWork survey, salary budgets rose a mere 3.1 percent in 2015. That means an employee who earns $50,000 annually received a $1,500 merit increase—which translates to $28.84 per week, or 72 cents per hour. Workers who just received their raise are undoubtedly happy. After all, they’re earning more money than they used to. But at some point, they will forget about the extra 30 bucks in pocket money they’re receiving each week. The question then becomes how to keep employees enthused and inspired throughout the rest of the year.
Moreover, it’s important to remember that merit increases represent just one factor in your overall compensation strategy. Consider the following points as well:
Base compensation must be internally fair and externally competitive. Giving an employee a merit increase when his or her base pay isn’t properly aligned internally or with pay rates in similar positions in the broader job market does not promote sustained performance. In fact, it may do just the opposite, given that more employers are moving toward greater salary transparency. Employees are starting to talk more among themselves about salary as well. The days when people’s earnings were a closely held secret may soon be behind us.
Benefits need to align with base pay. There is more to compensation than a paycheck. Organizations should take a holistic approach to their total rewards systems and communicate to employees that benefits—including professional development and training—have a tangible value associated with them.
Employees want rewarding work, but they also want a rewarding life. An increasing number of employees are saying “no” to long hours and unfulfilling jobs—even when the money is way above market. Merit increases will not cajole people into working harder and longer, especially if the alternative is to spend more time with their families.
So what will promote sustained performance improvement? Research suggests that managers play the greatest role in unlocking engagement—yet 2015 Gallup data show that only 35 percent of managers feel engaged themselves, and just 1 in 10 have the requisite skills and talent to effectively lead a team. The trickle-down effect is unfortunate, with just 31.5 percent of U.S. workers reporting that they feel engaged in their job.
Boosting performance starts by selecting the right people to be managers—and then equipping them with the training and tools they need to hire and manage the best talent. Managers must become coaches and mentors instead of hiding in their offices looking at spreadsheets. They need to recognize the excellent work of employees, encourage direct reports’ development and work on their own professional growth as well.
While doing all this is more complicated than simply handing an employee an extra $28 a week, it’s an investment that will continue to pay off all year long.
Sharlyn Lauby, SHRM-SCP, is president of ITM Group Inc. in Weston, Fla., and author of the blog HR Bartender.
There is an unfortunate backlash against merit pay programs in the business community as a result of seemingly inadequate results. However, the culprit is not the programs but rather the managers and HR professionals who didn’t implement them effectively.
So how can HR design a system that can truly reward high-performers? A good program must have the following qualities:
Support from top management. No merit program will work if your leaders don’t provide appropriate backing. That means they must not only communicate the importance of the program but also include it in their budgets. Communication must be ongoing to reflect a dynamic business environment.
Well-defined, objective performance standards. The criteria for reward must be explicitly defined and communicated so that everyone understands what it takes to qualify for a merit increase. Creating such standards is often difficult since many jobs don’t have measures that are easily quantifiable. But it can be done if managers are willing to put in the time and effort—and can obtain buy-in from employees.
Performance factors that are in employees’ control. It’s imperative to eliminate obstacles that prevent workers from meeting or exceeding the standards you’ve set. If critical tools frequently fail to function and employees must wait for them to be repaired, the reward is dependent on the work of others. Even the most motivated employee may get discouraged in that environment.
Adequate funding. In his textbook Strategic Compensation: A Human Resource Management Approach (Prentice Hall, 2012), Joseph Martocchio refers to the “just-meaningful pay increase”—in other words, the minimum raise necessary to inspire a meaningful change in performance. Inadequate differentials between high-performing employees and mediocre ones will sink your program and create distrust.
That’s an important point to consider in the current economic climate. Given that a survey from ERI Economic Research Institute projects only a 2.7 percent increase in salary budgets for 2016, many companies may not be in a position to make merit pay truly worthwhile at this time.
Effective management and timely rewards. To be most effective in maintaining high morale and performance, rewards should be given in conjunction with the presence of strong and consistent management.
Moreover, merit pay should be timely. HR should create multiple channels that connect performance with immediate awards. Not only does this help keep high performance constant, it allows the organization to provide smaller awards rather than significant salary hikes, which can be difficult to take back.
If these factors are in place, will merit pay foster continued high performance year after year? The theory put forth by American psychologist Edward Thorndike suggests that it will: “Responses that produce a satisfying effect in a particular situation become more likely to occur again in that situation, and responses that produce a discomforting effect become less likely to occur again in that situation.”
In other words, rewarding employees for good work will lead them to continue to do good work, while failing to do so may diminish performance. In the latter case, employees will reduce their effort or, worse, depart the organization for greener pastures (and greater rewards) elsewhere.
Matthew J. Stollak is associate professor of business administration at St. Norbert College in De Pere, Wis., and a contributor to CareerBuilder’s Talent Advisor Portal.
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