Merit Pay Increases Aren’t Keeping Up with Cost of Living

Recognize This! – If “raises” can’t keep pace with cost of living, should they still be called “merit pay?”

WorldatWork recently released their 38th annual salary budget survey showing anticipated pay increases, showing median salary increases at all levels at 3.0%. This corresponds to Hay Group’s assessment at 3.0% median pay increase expectation for 2012.

More interesting to me are the merit increase projections by performance category in the WorldatWork results:

  • High performers: 4.0% increase
  • Middle performers: 2.7% increase
  • Low performers: 0.7% increase

Factor into that annualized consumer price index growth of 3.6 % and the “merit increase” for low and middle performers completely disappears and is reduced to a negligible 0.4% increase for top performers.

I have to ask again, are annual merit increases the right approach to pay for performance?

Considering the angst and drama associated with the traditional performance review process that relies on differentiation methodology to lump employees into a 1-5 range of performance, is it worth it? Is there a better way?

I suggested in a post on Compensation Café this Spring:

“Year-round rewards commensurate with year-round recognition of employee efforts. Those who perform at a higher level are naturally more frequently recognized and rewarded for those efforts. Does that mean “raises” become a thing of the past? Of course not. They just take a different form, the most likely being:

  • A standard annual cost of living or inflation increase for all employees to keep salary levels in line with industry norms
  • Promotion-based raises”

I made this suggestion at a round-table discussion and was met with outrage at suggesting limiting “raises” to a COLA increase. Yet, looking at the numbers above, that would be better than the anticipated salary increase in 2012.

Note, however, I’m not suggesting limiting raises to COLA. I am suggesting using recognition and rewards to far more effectively remunerate employees throughout the year. An example would be recognizing an employee who agrees to take on a new task and excelling at it. Recognize and appropriately reward that person for his or her achievement in the moment! Don’t wait until the annual performance review or raise cycle!

Has merit-based pay outlived its usefulness? Is there a better way? What would you propose?

Derek Irvine

About Derek Irvine

The VP of Client Strategy and Consulting at Globoforce, Derek Irvine is one of the world’s foremost experts on employee recognition and engagement, helping business leaders set a higher vision and ambition for their organizations. As a renowned speaker and co-author of "The Power of Thanks" and "Winning with a Culture of Recognition," he teaches companies how to use recognition to proactively manage company culture. Derek holds a B.Comm and Masters of Business Studies from the Smurfit Graduate Business School at University College Dublin.

6 Responses

  1. […] be honest with each other and – more importantly – with our employees. Raises during the last several years have not even covered cost of living increases. There certainly isn’t enough differentiation in pay increases to support “pay for […]

  2. […] be honest with each other and – more importantly – with our employees. Raises during the last several years have not even covered cost of living increases. There certainly isn’t enough differentiation in pay increases to support “pay for […]

  3. […] Let’s be honest with each other and – more importantly – with our employees. Raises during the last several years have not even covered cost of living increases. […]

  4. […] an advocate of the annual cash bonus (as it quickly becomes an expected part of compensation), and merit increases no longer hold enough differentiation to matter (low performers get 2.3%, mid performers get 2.5-2.7%, high performers get 3.0). We might […]

  5. […] an advocate of the annual cash bonus (as it quickly becomes an expected part of compensation), and merit increases no longer hold enough differentiation to matter (low performers get 2.3%, mid performers get 2.5-2.7%, high performers get 3.0). We might […]

  6. […] an advocate of the annual cash bonus (as it quickly becomes an expected part of compensation), and merit increases no longer hold enough differentiation to matter (low performers get 2.3 percent, mid performers get 2.5-2.7 percent, high performers get […]

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