Survey Results: Is The Earth Moving Under The Annual Merit Increase? (The Conclusion)

Has the time come to shake up the annual merit increase?

Yesterday we began coverage of our survey findings where 124 compensation and HR professionals provided their answers to that question, based on what is happening in their respective organizations.  We learned that while most respondents' organizations are not considering changes to their annual salary increase policies beyond tracking and responding to competitive salary increase levels, a sizeable minority (34%) are attempting to break new ground.  We learned that smaller firms (<500 FTEs) may be leading the way in this regard.  We learned that there is still a lot more talk than action happening, with  three times as many organizations considering changes as have already planned or implemented them.

And we also learned something very interesting: that the kind of changes being talked about are quite different than the kinds of changes being planned or implemented.  Take a look at the tables below.  Notice that differentiation tops the options being considered, but it drops to a distant third when it comes to those that have been already implemented.

 

These data show that differentiation is the option most under consideration, cited by over half of those who have something “shaking.”  (Differentiation, you'll recall, was described as moving from a one-size-fits-all to a more selective policy that differentiates salary increase opportunity in response to mission critical skills, job value or other factors.)  Differentiation, however, comes in second to Shifting from Fixed to Variable where plans have been put in place to move forward in the next 12 to 18 months.  Differentiation comes in a distant third to Shifting From Fixed to Variable and No Longer Annual when it comes to changes that have already been implemented.

The upshot?

While the earth may indeed be starting to move under the annual merit increase, there appears to be more talk than action at this time – more organizations are discussing or considering changes to their annual salary increase policy than have actually made near-term plans or gone forward with implementation.

It is also very interesting to note that the options being discussed and considered relative to changing the annual increase practice are different than either plans that are underway or changes that have already been implemented.  What’s driving conversation, but not yet a lot of action, is the notion of differentiation.  As organizations look to the future and reflect on how to best direct the spending of precious base salary dollars, they are increasingly coming to the conclusion that this longer term investment must be done in a manner that responds selectively to business and talent needs (versus “one salary opportunity fits all”), helping to cultivate and craft the workforce needed for tomorrow’s success.  Yet, very few respondents have made definite plans or taken the first steps to put a truly differentiated salary increase approach in place. 

Why?

There may be a number of roadblocks, but a most likely one is that those charged with managing and supporting salary policy do not yet have the data or the analytical tools in place to define and categorize their workforce in a manner that supports differentiation in salary increase opportunity.  There is a tendency, among reward professionals, to focus on external benchmarking and competitive practices at the expense of looking more deeply within, and developing a more empirical understanding of our own workforces.  And so while we appreciate and value what differentiation has to offer, few of us may be in a position to execute on that potential.

Instead, those moving forward with definitive plans and implementing changes are focusing on shifting some of their available salary increase dollars into variable pay opportunity and extending salary increase timing to a period longer than 12 months.  These moves may help reduce some of the pressure on salary increase budgets, but do not demand the kinds of sophisticated information and tools that differentiation does.  They also fall somewhat short of the more strategic impact that a well planned and executed differentiation approach might deliver.

That's my take on the survey results.  What's yours?

Comments

[Mercedes McBride-Walker]

Hi Ann. Data and tools may definitely be key elements that are currently lacking. However, I also have a different (could be additive) take.

I've just finished a large research project focused on the relationship of organization culture and cultural values to meaningful performance differentiation, where 'meaningful' means the ability to make critical talent decisions (e.g., rewards, promotions, succession nominations) from a differentiated performance distribution.

One key finding is that there are certain values that most support a manager's willingness to differentiate performance: the values of competitiveness, winning, results, and aggressiveness. And if these values run countercultural to the dominant organization culture, the manager doing the differentiating and ultimately the communicating (and justification) of differentiated ratings (or potentially merit increases, bonuses, etc.) may be hard pressed to actually move forward with and publicize true differentiation. The potential for conflict, challenging conversation, and breaking cultural norms (e.g., differentiating in a harmonious, family-type culture) is enough to stop people from executing, even though it sounds great on paper.

Thanks as always for your timely and interesting posts!

[Ann Bares]

Mercedes:

The connection between culture/values and the willingness to differentiate performance ratings seems like a logical one to me - and completely fits my experience - thanks for sharing your findings on this here.

What we were attempting to study with this survey (and I say we because this particular survey had its genesis in conversation with a couple of client organizations with particular and strong interest in these questions), particularly in reference to the term "differentiated", is not the degree of differentiation in performance ratings and (thus) merit increases, per the classic merit increase matrix. Instead, as noted in the definition shared in the Part 1 post on Wednesday, we're looking at whether organizations are moving in a new direction beyond simply traditional performance rating differentation to "Moving from a one-size-fits-all (or mostly so) to a more selective policy that differentiates salary increase opportunity in response to mission critical skills, job value or other factors." What we were attempting to discover is the degree to which organizations are actually (because I've heard the talk) blowing up their traditional merit matrixes and moving to a new salary paradigm where salary adjustments are made in service of a whole new "investment" strategy that might feature critical skill growth/reinforcement or an effort to craft a new kind of workforce over time.

Because the term "differentiation" is used in so many ways, this might not have been ideally clear.

Thanks, as always, for weighing in and sharing your observations and experience.

[E. James (Jim) Brennan]

See Derek Irvine's http://www.compensationcafe.com/2013/04/when-you-cant-differentiate-based-on-compensation-what-do-you-do-to-stand-out.html post of today and the article cited in the comments from the WorldAtWork Journal this Quarter for more details. This is all very timely. The academic article http://apprd02.worldatwork.org/t/1625404/231372/784190/1003/ discusses many critical factors affecting differentiation, also.

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