REWARDING PERFORMANCE
There is (some) merit in merit pay
New research by Industrial Relations Services has produced evidence that merit pay arrangements can deliver a series of organisational gains, although the report makes clear that it is far from plain sailing. Three-quarters of those employers that use merit pay said they have experienced difficulties, especially in ensuring substantial pay rises.
Merit pay evokes strong opinions. The supporters argue that merit pay motivates staff and therefore improves individual and organisational performance. What’ s more, it is a major lever for change and delivers a message that performance is important.
Equally forcefully, the opponents maintain that rather than acting as an incentive to higher levels of achievement, it is more likely to demotivate staff and undermine teamwork. And it relies too heavily on the skills and judgement of managers who may be incapable of exercising it.
How successful is it?
Perhaps the most important issue covered by the IRS survey is whether merit pay is working in practice. The researchers asked organisations for their views on its success, about the problems they encountered and the impact on high and low performers.
But it’ s worth remembering that this is from the perspective of managers, rather than employees in receipt of these awards. With that caveat in mind, let’ s take a closer look at what IRS discovered.
The unmistakable message from the IRS survey was that merit pay can generate some fairly impressive business results:
as many as 86% of schemes are said to have improved individual performance
half of the schemes have enhanced corporate performance
a similar proportion have successfully supported a change in company culture.
Little impact on poor performers
All too often the focus in reward and performance management systems is on nurturing and developing high performers. Yet it is the poor performers who are the very people whose performance should be addressed by merit pay.
The most noticeable finding of the IRS survey is that merit pay schemes made their most positive impact on the behaviour of the high performers. A third of respondents said it had a significant impact on the performance of this group, while roughly one in ten of those polled thought it had a marked influence on poor performers.
Problems
Although the majority of organisations consider their merit pay schemes to be fairly successful , three-quarters reported problems (see table below).
1. The design
Received wisdom is that in periods of low inflation the allure of merit awards dims somewhat as there is little scope for meaningful salary rises for better-than-average performers. Predictably, the IRS findings tend to support this view.
The most frequently mentioned problem — cited for two-thirds of schemes — was that the pay awards on offer are too small to motivate employees to make any significant changes to the way they work.
2. The process
Besides this difficulty with limited merit budgets, virtually all the problems mentioned by the participants in the IRS survey can be bundled under two headings: performance management and communication and involvement — a point succinctly made by Duncan Brown and Michael Armstrong in their book Paying for contribution (to find out more, take a look at our book review)
Merit pay relies heavily on line managers’ assessment of performance and managing pay decisions in such a decentralised systems clearly presents some difficulties. In 52% of schemes, employees have questioned line managers’ judgement. And, perhaps linked to this problem, 38% have had problems with line managers being inadequately trained.
High levels of communication and involvement are a cornerstone of effective pay programmes. Sadly, according to the IRS results this does not happen as often as it should. Poor communication was highlighted as a problem for more than a quarter of merit schemes in the sample.
The problem with merit pay . . .
| Percentage of employee groups | Whole economy | Private sector | Public sector |
| Pay awards too small to motivate | 65% | 55% | 75% |
| Employees question line managers’ judgement | 52% | 52% | 53% |
| Line managers are inadequately trained | 38% | 35% | 41% |
| Information is poorly communicated | 27% | 32% | 22% |
| Employees think quota system is in operation | 27% | 19% | 34% |
| Scheme takes up too much management time | 25% | 23% | 28% |
| Focus on individual performance is less appropriate | 16% | 6% | 25% |
| Scheme adds too much to wage bill | 5% | 3% | 6% |
Sample: 63 employee groups.
Source: Industrial Relations Services.
Want to know more?
Title: The truth about merit pay , Pay and Benefits Bulletin 501, August 2000.
Survey sample: the five-page report is based on information supplied by 125 organisations, of which 61 operate a merit pay scheme.
Methodology: postal questionnaire.
Business sectors: of the 61 organisations supplying information on their merit pay schemes, 28 were in the public sector with 33 in the private sector.
Availability: contact the subscriptions department at Industrial Relations Services, tel: 020 7354 5858 or for editorial enquiries email the editor jeremy.baugh@irseclipse.co.uk
Jump to the IRS web site . . . www.irseclipse.co.uk