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A few weeks ago I wrote a short post sharing my thoughts on meritocracy in the workplace. You can read the full piece here, but one thing I pointed out was that the subjective nature of performance measurement often makes it difficult to put in place a compensation structure that truly rewards performance. Employees and managers alike often chafe at the concept of giving objective, candid feedback… and even when managers and employees want to give/receive that feedback, they often lack the tools to accurately do so.

As it concerns the latter point, Kris Dunn has an article up on The HR Capitalist outlining one reason why it’s so darned hard to measure performance. Dunn points out a truism that I’d never considered the implications of before; namely, he highlights that in smaller, newer companies employees tend to be more equitably compensated for their relative contributions to their organizations. But as an organization begins to see its ranks swell (growing past 100 employees) pay increases stop being true differentiators of performance. Instead, maturing companies implement merit matrices that turn pay increases into entitlements doled more or less evenly out to the lion’s share of the workforce. These increases have negligible impacts, failing to engage or incentivize the workforce while simultaneously squandering precious salary dollars that were previously used to recognize and reward the highest performers.

Dunn closes by suggesting that the solution here might be to shrink the span of control into clusters where it concerns reviews, segmenting merit budgets in a way that gives leaders greater lines of sight into who truly adds value in their organization and the power to allocate the budget accordingly.

…So on the one hand I think this is a really compelling idea – merit increases have long outlived their usefulness as a tool to truly drive performance. Instead merit increases mostly serve as pseudo-cost of living adjustments used to validate often antiquated review processes. With that said, the truth of the matter is that ultra-high performers don’t really view merit increases as the primary vehicles for performance differentiation anyway. This is because true top performers often get their increases from constantly promoting up in (or out of) their companies. And so the employees that are really getting punished by the merit increase system are top quartile (but not quite top 10%) performers that are only 1-2 moves (or less) away from their last promotion. Also punished are ultra-high performers who for one reason or another (mobility, being near the end of their careers, preference etc.) are not climbing any higher. These are really valuable talents (and an organization is better off holding onto them than losing them), but is keeping them happy worth upsetting the apple cart by phasing out the merit increase as an entitlement for the middle of the workforce? I’m not sure…

What do you think? If we start from the place that an organization’s top performers (i.e the top 5%-10% of their workforce) is going to get taken care of no matter what (either by moving up internally or by jumping ship), how do we weigh the relative needs of the upper quartile of high-but-not-quite-top-performers against the median and bottom performers? The former group is being disparately impacted by the merit system, but weighed against the workforce engagement drop-off that an organization might see from shifting those merit dollars away from the center, is the disenfranchisement of upper-quartile performers perhaps a necessary evil?

Just a Tuesday thought stream…

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