Recognise This! – If “raises” can’t keep pace with cost of living, should they still be called “merit pay?”

WorldatWork recently released their 38th annual salary budget survey showing anticipated pay increases, showing median salary increases at all levels at 3.0%. This corresponds to Hay Group’s assessment at 3.0% median pay increase expectation for 2012.

More interesting to me are the merit increase projections by performance category in the WorldatWork results:

Factor into that annualised consumer price index growth of 3.6 % (in the US) and the “merit increase” for low and middle performers completely disappears and is reduced to a negligible 0.4% increase for top performers.

I have to ask again, are annual merit increases the right approach to pay for performance?

Considering the angst and drama associated with the traditional performance review process that relies on differentiation methodology to lump employees into a 1-5 range of performance, is it worth it? Is there a better way?

I suggested in a post on Compensation Café this Spring:

“Year-round rewards commensurate with year-round recognition of employee efforts. Those who perform at a higher level are naturally more frequently recognised and rewarded for those efforts. Does that mean “raises” become a thing of the past? Of course not. They just take a different form, the most likely being:

  • A standard annual cost of living or inflation increase for all employees to keep salary levels in line with industry norms
  • Promotion-based raises”

I made this suggestion at a round-table discussion and was met with outrage at suggesting limiting “raises” to a COLA increase. Yet, looking at the numbers above, that would be better than the anticipated salary increase in 2012.

Note, however, I’m not suggesting limiting raises to COLA. I am suggesting using recognition and rewards to far more effectively remunerate employees throughout the year. An example would be recognising an employee who agrees to take on a new task and excelling at it. Recognise and appropriately reward that person for his or her achievement in the moment! Don’t wait until the annual performance review or raise cycle!

Has merit-based pay outlived its usefulness? Is there a better way? What would you propose?

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