Modest budgets for merit increases challenge pay for performance model (Guest Commentary)

Can pay for performance be meaningful when there aren’t enough dollars for real differentiation?
By Claudine Kapel
|Canadian HR Reporter|Last Updated: 11/17/2012

Projections regarding average salary increases for 2013 aren’t proving to be big news — with employers budgeting slightly more than three per cent — but they do raise interesting questions about pay for performance.

Mercer reported that projected average salary increases for 2013, among more than 750 Canadian employers, are expected to be 3.2 per cent, the same as the average actual salary increase reported for 2012.

This is up slightly from three per cent in 2011 and 2.9 per cent in 2010.

The survey results from Aon Hewitt tell a similar story. The firm’s Canadian Salary Increase Survey of 422 Canadian employers projects average salary increases of 3.1 per cent.

This is up slightly from the actual 2012 salary increases, which averaged three per cent.

Modest budgets for salary increases may be here for a while, especially given such factors as global economic challenges, corporate financial pressures and low inflation levels.

This could be prompting some organizations to ponder the value of pay for performance strategies. Some may argue pay for performance isn’t meaningful when the budget for salary increases is small because there aren’t enough dollars to accommodate meaningful differentiation.

But, at the same time, we can’t lose sight of the fact employees want to feel valued. They generally want to be recognized and rewarded for their achievements and contributions.

The solution to the merit increase quandary is more easily defined if one begins searching for the answer at a higher level. What is the organization’s position on pay for performance overall? Is it desired? If so, what vehicles can be used to make such connections?

There are many ways to recognize and reward high performance. Merit increases, although common, represent just one avenue. Other avenues, such as effectively designed variable pay plans, can also represent a strong platform for rewarding the achievement of desired results.

And there are countless ways to acknowledge high performers beyond the realm of compensation, including formal and informal recognition, promotions, training and development opportunities, mentoring arrangements, educational support and assistance with career planning.

So, organizations that really want to connect pay and performance can always find a way to do so. What’s needed is a multi-faceted strategy that considers the link between performance and rewards more holistically.

Aon Hewitt’s research found diverse practices related to the management of pay increases. While some organizations “are opting for approaches that focus on merit increases or pay for performance strategies,” others are “granting more lump sum payments in lieu of increases or putting more pay at risk by increasing the variable pay component and reducing salary increases.”

Mercer’s research, meanwhile, suggests “differentiating salary increases based on performance is the norm and remains an effective way for employers to wisely spend their reward dollars on the most impactful employees.”

Mercer’s data shows that in 2012, the highest-performing employees (six per cent of the workforce) received average base pay increases of 4.9 per cent, compared to 2.9 per cent for average performers (60 per cent of the workforce) and 0.1 per cent for the weakest performers (two per cent of the workforce).

The reality is there’s no one-size-fits-all solution when it comes to pay for performance. But organizations that really want to reward and retain top performers need to find a strategy that works for them, even in times of lean budgets.

Claudine Kapel is principal of Kapel and Associates, a Toronto-based human resources and communications consulting firm specializing in the design and implementation of compensation and total rewards programs. For more information, visit www.kapelandassociates.com. She is also Canadian HR Reporter’s Compensation & Rewards blogger. To read her weekly blog, and others, visit www.hrreporter.com.

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