Are Trends Converging to (Finally) End Merit Pay?

There are a number of movements afoot in the world of work that promise to impact the way we pay people.  Two in particular may well converge to provide the final straw that breaks the back of merit pay.

Let's begin with Exhibit 1: The "Open Salaries" Movement.  Pay transparency is coming. While it is unlikely that we will reach a point where every organization opens up all compensation information for every employee, I believe that the momentum and spirit behind the pay transparency movement will lead many employers to eventually embrace it, drawing back the curtain to reveal the details of their pay programs and practices.

This may or may not produce all the "benefits" that the movement's proponents claim.  "Open" pay won't automatically be more "fair" because fairness is a subjective, complicated and highly personal thing, ultimately a slave to our collective inability to objectively gauge our own contributions.  Transparency will, however, change the way compensation is designed and pay decisions are made.  As with any change, there will be both intended and unintended consequences.  Will more openness cause managers to be more cautious and risk-averse in their pay decisions?  I've had more than one public sector compensation specialist -- a pay pro already working in the world of open salaries -- suggest that transparent systems drive managers to pay everyone the same, avoiding differentiation that favors high performers/high potentials because those decisions can be hard to explain and defend.

Enter Exhibit 2: The "Blowing Up Performance Appraisal" Movement.  Adobe has been in the news lately, the most recent of some prominent organizations that have decided to ditch performance appraisals in favor of a more forward-looking process featuring feedback and coaching over look-back assessments.  As few organizations believe their performance management process is working ideally, many eyes are on these pioneers to see what lessons emerge from their experiences. 

Pay-for-performance in organizations that have elected to kill performance ratings is necessarily different.  Per the recent interview with the company's Head of Rewards at the Compensation Cafe, Adobe still allocates merit pay budgets to its managers but does not provide a formal matrix or set of salary increase guidelines to them.  Managers are accountable for, but can use their discretion in, spending those allocated merit funds well.

You see where I'm going with this, right?

How long will merit pay last in a world where we're struggling to accurately appraise employee performance -- to the point where we increasingly ready to chuck the whole effort -- and where salaries/salary increases are out in the open?  Not very long, I'll wager.

What will we do instead?  Strictly market-based wages with "hot skill" premiums as appropriate? More emphasis on variable pay plans designed to reward specific, pre-determined individual or group metrics?  Will recognition and non-cash rewards step into the void to provide the necessary differentiation for key talent?

What does your crystal ball say?

Creative Commons Image: "Converging Footsteps: My Father and Stepmother" by CarbonNYC

Comments

[E. James (Jim) Brennan]

My crystal ball says that everyone will continue to do whatever works best in their unique environment. Some will go transparent with strongly-defended merit pay systems, some will attempt to continue secret subjective inconsistent methods, some will openly share ranking schemes (grades and their parameters) while basing pay progressions on uniform published seniority scales, some will pay for skills while discarding workers who are never given a single summary appraisal "score" but despite counseling/remedial methods still fail to meet the requirements for continued employment and are determined unsuitable or redundant.. and other combinations. Market-based pay, hot-skill premiums, variable contingent pay plans for both individuals and groups will continue to grow, both in sunset and concatenating forms, too.

What will NEVER happen is an employer admitting that they don't care about work output results. No matter what kind of weasel words they use to hide the pea under the moving shells, no enterprise will voluntarily prohibit the exercise of managerial discretion, abandon confidentiality regarding personnel matters or express indifference about employee performance. They WILL try to avoid toxic terms that raise the hackles of critics, though, without really changing the background management behaviors that will get new friendlier descriptions.

[John Ware Jr.]

This is a really good read and appreciate what I would say is, an accurate depiction of the business world in the not so distant future.