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Image Credit: <www.nibco.com

Image Credit: <www.nibco.com>

So merit increases in the U.S. are projected to be around 3% in 2014. Looking at the range around these increases, top performers will be receiving increases of about 150% beyond what average performers receive. In practice, with the median income of a college educated person in the U.S. being roughly 43k, this means we’re talking about $645 a year before taxes.or approximately $54 extra dollars a month for top performers.

This isn’t really meaningful pay differentiation, is it? Considering that human performance does *not* in fact fit a normal distribution (top performers in an organization are responsible for the majority of output while most workers are below average), organizations have got to do a much better job of creating differentiation between superstars and median performers. This is easier said than done, though. Merit increases quickly become entitlements, and when the market is doling out increases as if workforce performance fits a Gaussian distribution it is difficult for any one employer to buck that trend.

Image Credit: <images.businessweek.com

Image Credit: <images.businessweek.com>

…With this in mind, lately I have some energy around setting aside a percentage of the money intended for merit every year, and instead allowing managers to allocate it out to top performers in the form of a spot bonus: This is a one time bonus that a manager can give to direct reports performing at an exceptionally high level.

I like the spot bonus because in addition to keeping salaries down by paying out as a lump sum money that otherwise would have been allocated as a permanent 1. Permanent increases compound on themselves year over year (adding considerable fixed expenses to an organization’s operating costs).increase 1, the spot bonus more closely aligns pay with performance and creates a trigger in employee’s minds directly aligning exceptional performance with extrinsic reward.

I dunno… just a thought.  Some of the top of mind strategic questions here are how much of the merit budget do you set aside for spot bonuses (if the market is paying 3% at median how much can you shave off the top before impacting morale?), and what (if anything) do you communicate about the change to employees?

As always, please share your thoughts in the comments section below.