Folly # 2: Incremental merit increases

Back in January I described Performance Management Folly on two counts: 1.) Performance Appraisals; and, 2.) Base salary increases in annual small increments.  This post explains why the merit raise thing is so universally ineffective.  First, of course, is the pin-point that small pay raises doled out to the masses on an annual basis do nothing positive for job performance, productivity or worker satisfaction.  Moreover, these little up-ticks fail every motivation test that are known to affect human behavior– immediacy of the reward, salience of the reward and direct-connection between the reward and desired outcomes– are not at play in the annual increase game; and, therefore, do not  drive sustained behavioral change.  Meanwhile, this oh-so carefully budgeted and delicately allocated annual expense offers no discernible benefit to customers and has zero impact on market share while directly reducing the company bottom line.  In short, small annual pay raises yield no substantive return to the business at all.  None.

No Merit

“Merit” is supposed to imply a reward for something good accomplished.  But that’s not what most companies do when it comes to annual raises.  Instead, in actual practice, these little bump-ups are nothing more than inflated cost of living increases that create a sense of entitlement. Mary Jane’s  annual pay  increase is less than last year.  She still gets a raise mind you, for doing the same work, but she is fuming nevertheless.  She actually feels punished as she takes the money. 

Okay then, let’s give her a little more this year — then she should be thrilled.  Not quite. Mary Jane may experience a fleeting moment of true gratitude upon learning about her above-average raise. This nice sensation will last about an hour.  But then she quickly retreats back to long-learned entitlement– Damn right I deserved it, she exclaims.  It’s about time. And because she was given a little more this time; she is certain to expect yet even more next time. That’s how humans are–all of us.

And allocating this entitlement by splitting hairs has no merit whatsoever. HR practitioners have been stymied for decades on how to effectively  ration  limited  pay-raise budgets to the workforce. HR also gets  frustrated with managers’ notorious ineptness at offering constructive feedback to employees while explaining how and why raise amounts are determined. No matter how well trained or practiced most supervisors just can’t seem to deliver the merit message with credibility or confidence.  Why is that?

Because differentiating annual performance-based increases at 2% or 3% or 4% is stupid, that’s why. And training managers to honestly and rationally explain something stupid as if it were not–is impossible. Nor can  HR Specialists make inherently dumb ideas smart with feedback charts, appraisal checklists and compensation policies.  It simply can’t be done.

The Merit System

Decide for yourself if I exaggerate.  Let’s start with the process. The company allocates a “pool” for payroll increases to all—usually adding 2.5% to 4.5% annually to total base payroll. That can be a lot of money for an employer of even modest size, especially compounded year after year. But to the average wage earner who gets his 3% cut—it is, well, unremarkable. That’s why when raises are announced there is an immediate spike down in employee morale. The vast majority of workers are unhappy or indifferent about their dinky raise.

You think they would be grateful!  Of course, it doesn’t work that way. Three negative human inclinations are at play instead:

1. Entitlement as so described. I deserve at least 3% because I worked another year in America.
   
2. Disappointment.  I was hoping for more after doing so well.
3. Resenting Differences. I get only 1% more for picking up the other guy’s &@*%#! slack all year?!

Entitlement, Disappointment and Resenting Differences—traditional pay and reward systems actually create and fuel these negative dynamics and firmly root them in your work culture. That’s well, not good. Why do companies spend money on this?!

Fuel the Flames

Then these hard feelings are exasperated by classic management mistakes. The most common faux pas is igniting false expectations by inferring that a good raise is eminent. I’m optimistic that the company will reward your hard work, says the well-meaning supervisor. Then, when it doesn’t happen, the employee is crestfallen and the manager wonders why.

Sometimes managers actually state a dollar amount usually months before the raise is due and with a disclaimer: I can’t promise anything, but I hope to give you 5% or more if you keep up the good work. —That’s a huge mistake. The employee remembers such conversations precisely, except for the disclaimer which he didn’t hear at all.  When the raise doesn’t materialize on the due date, he feels duped, even betrayed.

Another common blunder is for the direct supervisor to wash his hands of any responsibility for the final raise amount.  I put you in for 5%, but the VP reduced it to 3%. She said 5% wasn’t in the budget.  This misstep happens far more often than understood and results in zero respect for the supervisor who is apparently powerless; plus mistrust and resentment for the top brass who are making money decisions about staffers with whom they rarely interact. They have no clue what I do yet decide my raise. What BS!

Yes it is. Especially when the direct supervisor is the one responsible for appraising job performance.  How can a company claim that salary increases are linked to job performance if the decision about the reward is separate from the decision about job performance? Employees make those connections (or disconnections) very astutely and it drives them crazy.  Even more frustrating is the out-right corporate lie about the limited increase budget.  Everyone knows that the company can choose to give any one individual a big bump in salary at any time. Such exceptions are common.  Supervisors who try to placate the disappointed worker by hiding  behind a budget  are wimpy and dishonest.  Employees hate that.

Misguided Equity

Dynamic # 3–Resenting Differences–applies to your top 20% of highest performing employees.  HR-types fuel this top-notch resentment in the name of “equity” by designing roadblocks and rules to keep the best performers’ salaries in line with the rest. That’s the function of pay grade structures; the increase matrix, and salary market studies that so consume HR bureaucrats.  In the end, it just makes things worse and arguably costs more money doled out to lesser performers at the expense of your best performers.

So why would HR do that? Because inequity is an affront to the heart and soul. Here’s how this peculiar human dynamic plays out:  John Smith inherits $2 million dollars unexpectedly from a distant relative and is set for life. His brother Charlie received $2.5 million from the same inheritance.  Yes, John may be overjoyed about his good fortune. Who wouldn’t? But it will torture John for life that his brother Charlie got more.  John will resent the inexplicable inequity until the day he dies. And you can be pretty sure John’s last will and testament  ain’t going leave a dime to that &%$# silver-spooned, unworthy brother Charlie.  That’s just how people are–all people. Even in the best of circumstances inequity breeds resentment. HR people know this, so they proceed with caution.

But here’s the workplace rub:  Monetary inequity is HR’s primary concern; but task inequity and performance inequity are just as real and just as hurtful to the human condition. Your best and brightest get resentful real quick when their output is 30% above the rest, but their raise is only 1% higher. Regulating monetary inequity favors mediocrity; promoting monetary inequity favors high performance.  Rewarding performance inequity proportionately to achievement and results is the way to go. It’s easy: Significantly higher performance should fetch significantly greater reward.  That’s as fair and square as you can get.

To pull it off, you have to allocate the money correctly and decisively, not in ½ percent increments linked to a bogus performance score.  When rewards are allocated in 2%-3%-4% fashion it’s a huge squandering of company funds which go into a performance management black hole every time you do it. I remain amazed that most established employers have been throwing away dollars like this for decades. It’s an astounding cash waste– budgeted, institutionalized and regularly scheduled year after year.

So that’s the business case: Encouraging entitlement + causing high-performance resentment + equity that drives mediocrity  + poorly allocated money with no return  = stupid.

A Better Way a Decision Away

You bet there is a better way to do it. I’ll list the solutions here and expand on them in detail in the next post. Here’s how you turn on the light and Switch HR when it comes to pay-for-performance:

• Drop your cumbersome performance appraisal system. Kill it dead and toss it.
• Certainly do not offer formal developmental feedback in timing or sync with an annual raise.
• Adjust to a common salary change date so everyone is eligible for a raise at the same time.
• However, do NOT set the same month or payroll week each year. Vary it.
• Force rank all employees by best performer to worst performer on a spreadsheet.  Readers learned about the forced ranking in my previous posts on Human Resource Planning.
• Now, lists in hand, highly differentiate merit rewards, giving top performers outstanding raises (8% to 10% ought to do it). Give “Just Okay” (and worse) 0% to fund higher raises for the best. Everyone else gets cost-of-living. I’ll give you a chart to illustrate how in the next post.
• Replace the antiquated appraisal system (the one you threw out) with Switch HR employee development tools, including voluntary self-assessment and simple 360 feedback– none of it linked to a raise.

If you can’t muster and rally the leadership courage required, there is another way that’s arguably even better: Bag the merit increase thing altogether and put your reward dollars in simple, but powerful innovations including spot bonuses, project milestone incentives, cost savings idea rewards, referral bonuses and more. That’s a pretty radical change too and requires a post of it own to explain.

A lot of solutions to be sure and next we tell you how.  Meanwhile, don’t be stupid.  Stay tuned.