How To Use This System To Reward Employees, Recognize Special Merit Performance And Do It All Fairly
One of the thorniest issues around managing performance is whether one should couple it with merit increases or to use the process to determine pay increases. Some experts have suggested, and for good reason, that it's best to decouple the two, but that leaves the question: How DO you reward good performance with pay increases if you don't base it one performance reviews.
The desire to couple the two isn't going to disappear, so then the question remains: How do you use a performance management system to determine pay increases FAIRLY, while minimizing disputes and disagreements?
Fortunately, the Hooper-Bacal Method actually works better than conventional ratings and ranking systems for this purpose. It's much more fair, and more reality based. So we have two methods, both of which have been proved in real world workplaces.
Method One: Establishing/Negotiating Bonuses And Pay Raises Up Front During Goal Setting
Because it's not possible to objectively assess the value of an employee's contributions in a meaningful way, the alternative is to negotiate with employees, the criteria that need to be achieved to receive a pay raise. This is done during the performance planning process of performance management, LOOKING FORWARD.
Once you have a set of individualized criteria for receiving a bonus or pay raise, you have clarity. The employee knows that if he does what's been agreed upon, he will receive a monetary reward, although it may not always be possible to specify how much it will be. That's because often companies don't know how much money they can afford to pay in salary boosts until after the fact.
It's a remarkably simple process. It's not necessarily easy, but it's much better than all the other individually based ways of doing it.
Method Two: Employees Apply For A Merit Increase Based On The Past Year's Performance
Believe it or not, this method is something I've seen work well within a government setting. It works this way.
At the appropriate time (often the hiring anniversary, but it could be during the short performance review phase once a year), the employee has the options of requesting that his salary be reviewed for increase, due to contributions ABOVE AND BEYOND what s/he had to do.
The assumption is that a person's salary covers compensation for all the regular job responsibilities. Merit is defined by going above and beyond, for example:
Doing job tasks or projects that are beyond the scope of routine duties, and doing so in a way that has a signficant positive impact on the work unit's success.
In effect, the employee approaches his or her immediate supervisor verbally to submit a "formal" application for a special merit increase, along with the reasons. Those reasons have to be consistent with an overall set of criteria for the company that sets forth what consititutes special merit performance. If the supervisor agrees it's worth going ahead, the employee is asked to submit a written request, usually less than a page long, outlining the reasons. That, in turn is usually reviewed a little further up the line, and evaluated.
You'd think that there'd be countless people creating tons of extra work trying out this process, but in fact, experience suggests that's not the case. In fact, merit increase requests tend to be quite few and far between, because it involves a true belief by the employee that it's deserved and that it gets pretty clear when requests are warranted or not. Employees simply don't ask when they really know they don't meet the criteria, because they know it's wasted effort.
Here's a few relevant quotes from the Province of Manitoba Pay Practices Guide on the topic:
Can an employee receive additional special compensation in recognition of exceptional performance?
When a situation of exceptional performance on the part of an employee comes to the attention of management it should be encouraged by some form of recognition.
For the purpose of this policy, exceptional performance means performance by an employee which can be demonstrated to be at a level beyond the normal standards and expectations of the employee’s regular assigned job requirements and for which the employee has not and cannot otherwise be recognized by way of a tangible form of reward or other appropriate means applicable to the situation.
Careful consideration of any request for additional special compensation in these circumstances is required to ensure that such recommendations are truly justified and based on exceptional performance. Requests for additional special compensation should be considered on the basis of internal relativity within the civil service; assessing how the employee’s performance relates to other employees performing similar functions in the same department or same classification across the civil service.
Special Merit Increase
A special merit increase may be considered following the completion of the special circumstances during which an employee’s performance was demonstrated to be exceptional.
With the approval of the Deputy Minister of the department concerned, an employee may be granted a special merit increase equivalent to one step in the pay range of the employee’s position on the employee’s anniversary date or any other monthly anniversary date deemed appropriate.
A special merit increase once granted is not rescinded and therefore carries a cumulative benefit, remaining until the employee reaches the maximum of the pay range for the position. For this reason requests for a special merit increase must be considered carefully in respect to the principles of fairness, consistency and merit to ensure such recommendations are truly justified and based on exceptional performance
Special Lump Sum Payment
A special lump sum payment may be considered following the completion of the special circumstances during which an employee’s performance was demonstrated to be exceptional.
With the approval of Treasury Board, an employee may be granted a special lump sum payment calculated as the difference between the employee’s normal pay rate and an appropriate higher pay rate applied to the specific period during which an employee’s performance was demonstrated to be exceptional.
Since this is a government policy document, it does have a bit more bureaucracy attached to it than would be ideal, but it does show that this "on request" process is actually used in the real world. Outside of government the process can be made much simpler, and that's what we really want. We want employees who truly may perform above the standard job expectations to apply and be rewarded, while making it difficult for peope to make frivolous requests.
The first method works well, and has the added advantage of providing clear, achievable incentives for an employee, because he knows this is truly a pay for performance system. The latter also works, but the catch is that the criteria for special merit increases have to be clear, and generic enough to apply to the entire company. That's doable though.