Merit Pay Satisfies No One – and Upsets Many

First, some truths based on overwhelming research and evidence:

  1. Individual pay for performance does not improve organization performance.
  2. There is no evidence that performance appraisals improve performance.
  3. After three decades of research, there is no evidence that merit pay improves either individual employee performance or organization results.
  4. Individual employees do not trust their performance appraisal systems.

Furthermore, merit increases aren’t enough to motivate employees – but they will irritate them.  You’d have difficulty feeding a family of four at McDonald’s once a week on the additional pay a high performer gets over an average performer. 

Example:  Average 2009 merit increases are projected to be 3.6 to 3.8 percent, with the highest performers getting 5.6 to 6.0 percent.  For a $50,000 salary, the difference between the average and highest is 2.0 to 2.2 percent.  2.1% of $50,000 is $1050, or $20.19 per week before taxes.

Even when there is significant pay differentiation between weak and high performers, the cash difference isn’t much.  And many studies have shown that differentiation destroys engagement, breeds distrust, and undermines teamwork.

So, what does improve performance?

High performance companies align all the elements of strategy implementation with compensation.  This includes:

  1. A clear strategy effectively communicated through the organization so people understand their roles.
  2. An organizational structure and processes that enable information, collaboration and decisions to flow in all directions.
  3. Co-workers who are competent, productive and positive.
  4. A culture of collaboration and high performance.
  5. AND rewards that reinforce the strategy and values.

Treating performance reviews and merit increases as annual administrative exercises puts the focus on administrative deliverables, instead of on strategy, values and business outcomes.

Performance management can be a powerful tool to align effort and improve performance.  But it will never achieve those results the way it is traditionally practiced.

(Bob Legge helps clients improve performance and return on people.  For more about this topic, go to http://www.leggecompany.com/articles.htm)

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