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One of the biggest issues I see with pay for performance (which for the record I fully support) is that with the economy so bad, most companies can't affort do do it right. With a 3-4% merit budget, you really can't differentiate much, so you either would alienate your steady but not stellar performers (a key group) with less than what amounts to a COLA, or you vary the percentages slightly but your top performers don't really get all that much more.

Jill:

I would concur with your observation - the fact that we've been holding at 3-4% merit budgets for so long really constrains our ability to do much differentiation with performance-based salary increases. I think this is one of the big drivers behind the growing popularity of variable or incentive pay - the acknowledgement that merit increases simply cannot carry the entire "pay for performance" burden on their own.

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    Compensation consultant Ann Bares is the Managing Partner of Altura Consulting Group. Ann has more than 20 years of experience consulting with organizations in the areas of compensation and performance management.

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