…Okay, so this morning I was reading this great piece from CEB talking about how several employers – led by GE – are rethinking annual raises. And by “re-thinking” I mean “considering replacing with something less cyclical and more centered on moment to moment performance”. Sounds great, right? If organizations are moving away from annual performance conversations and towards continuous feedback (and it’s working) then why not have compensation/incentive design reflect this new approach to feedback and performance management? Well, for starters there’s this:
Only 1.2 percent of U.S. companies use a discretionary timescale for increasing base pay, according to this year’s compensation survey by Mercer LLC. About 90 percent of companies have a fixed date when everyone receives their raise, assuming one is granted, while about 5 percent make the change for each employee on the anniversary of their hiring or move to their current job.
^In what is likely a surprise to no one, 95% of employers have an annual review process around comp increases – and most of the 5% that don’t are closer to having nothing at all than a continuous process like the one GE is flirting with.
…But why is that? I mean – if one really thinks about it – most employees are unhappy with the 2%-3% they are getting every year. They expect it, and when they receive it often feel like they are being shortchanged in some way. Whether this phenomena is a product of collective illusory superiority or workers really having a valid beef because wages have not kept up with productivity (maybe a combination of both?), at this point the merit increase is more of a retention strategy than a vehicle to recognize and reward high performance: And the de minimis difference between what top performers and average performers receive at review times just further drives home this reality.
But then how does a company break this cycle? Do away with merit and your average performers (who are collectively every bit as important as your stars) will leave the organization. But if you don’t differentiate performance then you push your top performers out since that’s the best way they can get paid.
^To control for the flaws in the merit system, some companies are offering more spot and performance bonuses, with such dollars making up an increasingly large slice of total payroll. Which is fine… except it doesn’t address the fact that employers are still sinking huge sums of money annually into a benefit that doesn’t improve performance and doesn’t make high performers feel recognized. Merit is just the (very high) cost to retain.
…I am not saying anything new here… but thinking (or writing, I suppose) out loud I find myself considering how expectations are formed (and how they shape behaviors) to begin with. Namely, (1) something happens to us for a while, (2) it is a net positive, (3) we get used to it, and (4) our thoughts around one or more aspects of ongoing happiness become tied to the regularity of that thing.
…But just like an expectation that salary will keep going up (or at minimum stay at the same level), the merit increase expectation can be challenged (and changed), I think. For example, if one day an organization just started rewarding its employee for performance on a non-cyclical basis then at the end of the year there would be people that got small or no increases. Some of those people would be mad and leave, replacing them would be painful… and then new expectations around pay would be set.
…So ultimately this is just a thought stream. I don’t have any empirical evidence that any given company could move away from the merit cycle without suffering terminal retention and/or engagement issues. But I do know that expectations are formed through our experiences within a culture, and that cultures change. Whether an organization can have a strong enough culture to insulate itself from broader market pressures around cyclical pay raises is a different, open matter (maybe GE will answer it for us?)… but I find it interesting that the merit cycle is as entrenched culturally in the U.S. as, say, the 40 hour workweek. Employees don’t like it. Employers don’t like it. Why hasn’t anyone managed to input something different at scale yet?
As always, please share your thoughts in the comments section below.