The View from HR

The insanity of giving similar merit raises to all employees

March 23, 2013 

Insanity is “doing the same thing over and over while expecting different results.”

So why give almost everyone a similar “merit raise” and expect it to reward our best people?

Yes, it is easier to give everyone something than provide a few with nothing. We often pick a norm (such as 2.5 percent) then make a few exceptions. Not much is left for meaningful exceptions or to meet competitive pressures. This is common and it stinks.

Some employers speak of more sophisticated methods and strategies. Too often, when you pull back the curtain, it is a prettier version of the stinker.

The reason most employers have mediocre compensation processes is that they are unwilling to make tough distinctions fairly and communicate effectively. In other words, good compensation planning includes telling some people they are average or paid too much.

Get most from workers

HR is part of the problem. We are so concerned about second guessing by a federal regulator, we seek the safety of “one-size-fits-most” plans. Or, we pretend that “this job” is worth $X no matter who is in it or how they perform (within a too-narrow range). Yes, it minimizes tough decisions and restrains managerial exuberance. It also blunts the impact of payroll dollars on overall results.

Do you want a compensation system that satisfies regulators, corrals your weak managers, keeps the masses from rioting and makes a painful annual process more automatic? Or do you want to get the very most from your first or second largest expense item?

Good compensation plans support the culture, demographics, profit margins, lifecycle stages and business strategies of an employer. Do you see how different this is than a plan that came from a friend (or website), focuses largely on defending a pay claim, minimizes tough conversations and hopes for the best?

Consider some of these concepts as you budget for the next cycle. Employees, these are useful for you as you talk with managers about your pay level. There is no perfect template and the results must be supported by business reasons.

Look at market rates

You should know where you stand in the market and be purposeful about staying there. You might choose to be high in some roles and below market in others. If a super-performer brings much more value to the firm than others in the “band,” you better find a way to deal with that or someone else will. If managers do not confront poor performers or overpaid roles, perhaps the manager needs confronting.

If you use the “2.5 percent pool” version of compensation insanity, turn it on its head this year. Start with a list of your top 20 percent of performers (you know who they are), make sure you understand the market for each role and decide what you need to do to ensure their compensation is fair. Then, and only then, see what you have left for the pool.

March Madness is for basketball, not compensation planning!

Bruce Clarke, J.D., is president and CEO of CAI, a human resource management firm, with locations in Raleigh and Greensboro, that helps organizations maximize employee engagement while minimizing employer liability. For more information, visit www.capital.org.

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