Is this the end of Merit Pay increase?

It’s been awhile that I couldn’t spend time on my blog, but after reading this month’s WorldatWork Journal, I wanted to share some thoughts regarding the merit pay.
I feel that it’s a good timing to question merit increases hence it’s the time for pay reviews here in Dubai.
As per the article authored by Scott, Somersan, Repsold in this month’s issue, I quote a paragraph:

Low merit pay increases in recent years have made it difficult to differentiate the rewards of high performers from those with only average performance. Furthermore, getting managers to differentiate performance across their employees is difficult. One strategy for improving merit pay that has been discussed in recent years is to separate pay adjustments based on labor cost increases from increases for good or exceptional performance. The former would be based on the cost increases in the labor market not on employee performance. Thus, merit increases that were previously rolled into base pay would be given as bonuses, which does not increase base pay and long-term fixed payroll costs.

I would like to concentrate on the last sentence. I’ve experienced very high and also very low levels of inflation in some countries. As the authors also implied, it was easier to link the merit increases to inflation and cost of living and labor in recent years. However, especially in emerging and developed countries, trying to differentiate employees with merit pay linked to inflation started to be an issue because of low increase rates.

An example:

A very aggressive merit matrix set with regard to (of course) corporate costs and budgets would have maximum differentiation of 300% -tell ya, it’s a VERY aggressive one- between a top performer and low performer.
Multiplying this with a very low merit increase like 2%: Max. differentiation is only 6%?

Here it is. A basic example showing that merit pay is not enough anymore to be a differentiating factor for the high performance because I don’t think it’s rational to tell a high performer that he/she is differentiated from a low performer by only 6% of the annual salary. It sounds funny, I know.

In the new world’s economic outlook we need to revise our reward schemes and be more flexible and creative. We have the tools and practices – just need to use them accordingly and smart.

Last but not least, I think it’s a good idea to rely less on merit increase and try to differentiate employees with a short-term incentive where we also need to leverage on our performance management systems and processes.

Let me know what you think about this topic by writing a comment to this post.

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