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Has the Merit Increase Run Its Course?

Recognize This! – Merit increases no longer offer the differentiation they once did for true “pay for performance.” Perhaps it’s time to consider new approaches.

It’s that time of year! You can feel it in the air. The anticipation… the preparation… the dread.

No, not Spring. The annual performance review. Many companies target the March/April timeframe for conducting the reviews and handing out merit increases. Except, of course, for those who choose to disassociate the review from the pay increase in an effort to communicate to employees that the review itself has nothing to do with raises. (This is futile, by the way. Everyone knows their raise is dependent on the review in some fashion.)

Too many employees (and managers, for that matter) muddle through the performance review process simply to get to the merit increase possibility on the other side. But how relevant is that increase in today’s workforce? Merit increases remain stagnant at about 3 percent (not much better than cost of living), and companies continue to sit on record profits, choosing to maintain and increase margins rather than hire or increase wages.

Ann Bares, editor of Compensation Café and author of the Compensation Force blog, recently dug into this more, asking:

“There are rumblings underfoot among compensation and HR professionals concerning the once sacrosanct annual merit increase and whether the time may have come to (really) shake things up.

“Should we be moving away from the one-size-fits-all, same-for-(nearly)every-employee merit matrix to something more differentiated, more strategic?  Is it time to reconsider the ‘once each year’ timing and look at other, particularly longer, alternatives?  Should we finally get serious about shifting some portion of this annual increase in fixed base over to some sort of variable opportunity?”

Ann is running a brief survey on just this topic, and I’m very interested in the findings. Long-time readers know I am not an advocate of the annual cash bonus (as it quickly becomes an expected part of compensation), and merit increases no longer hold enough differentiation to matter (low performers get 2.3%, mid performers get 2.5-2.7%, high performers get 3.0). We might as well be honest and call these “merit” increases what they really are – cost of living increases – and turn to new ways appropriately recognize and reward those who go above and beyond. And we should do so in a frequent, timely and specific way, instead of reserving our praise and appreciation for the annual review or annual bonus.

What do you think about Ann’s questions? Has the merit increase run its course?

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