The Myth of Merit-Based Pay

At some time or another, you've probably been through a performance review at work. Hopefully, you got a well-deserved salary bump based on that assessment.

For decades, employers have sorted employees into various segments to recognize different levels of performance and to hand out "merit" pay increases. If they're honest about it, most managers will admit that they would rather clean the office refrigerator than conduct another performance review. And that aversion isn't always because they dislike the task, but because the process is broken in most companies.

Some academicians are now suggesting that merit-based pay programs don't improve employee or organizational performance. My reaction to this finding can be summed up in one word: Duh! You'd have to be living in a cave not to know that the paltry merit increases many organizations mete out won't sustain a person's motivation to go all out for any job.

Plus, in organizations that rely on pure merit increases, some people inevitably exhibit behavior that's beneficial to them, but detrimental to the team. What is interesting, though, are the ideas floating around to deal with the issue.

Jeffrey Pfeffer, a professor of organizational behavior at Stanford's Graduate School of Business, suggests that group bonuses, profit sharing plans, and other gain-sharing arrangements are more effective than the traditional merit pay strategy.

The stakes in how organizations handle merit pay are huge. Human resources executives help manage the $4.5 trillion that US companies spent on wages and salaries in 2008. And, they'll also have a say in how to divide up the $200 billion increase in wage and salary spending for 2009.

For most people, gain-sharing approaches to compensation seems obvious, but many organizations are stuck firmly in the past. Consultants have an opportunity to help clients see the benefits of alternative compensation approaches and the potential productivity gains that can result.

Comments

[Margot W.]

Maybe others can convince clients to try these new ideas,which are good. But I've found them very resistant to changing their "merit" based pay systems.