NYC-based company’s merit system produces better results: Consultant
Money isn’t a taboo subject at SumAll. Employees know exactly what their colleagues make, the details of their performance reviews and how much of a raise they’re getting.
The New York City-based data analytics company’s 30 or so employees can open a shared document on the network to compare salaries, including equities and bonuses for all employees, says SumAll CEO Dane Atkinson, whose own salary is among those listed.
“We have a lot less time lost to games, bureaucracy, negotiations all the drama that goes along with salary,” he says. “It’s much clearer to be a merit-based business, so people strive to really prove themselves, not to one individual who’s controlling their salary, but to the team as a whole.”
Atkinson refers to the company’s structure as a “meritocracy.”
“There’s no preferential treatment given just by one working personality,” he says. “Everybody sees what everybody’s making, everybody struggles to raise their impact on the business and move up into higher pay bands and it sort of takes all the stress away from it, which is extremely nice.”
It’s this type of compensation strategy that David Tyson, president of Toronto-based compensation consulting company Tyson and Associates, recommends more companies take on.
“I think we have to start disclosing more,” Tyson says. “Most of these so-called merit programs are shrouded in secrecy so that the employees don’t know that their performance could actually (result in) bigger (pay) increases.”
Exposing pay rates within a company encourages employees to achieve more because everyone can actually see when someone is rewarded, he says.
“If you disclose everybody’s salary and the size of the salary increase that they got, the expectation that they will actually get a bigger increase if they perform better would be more believable,” he says.
Traditional merit pay programs don’t really accomplish what they were designed to do anymore, Tyson says.
“They’re a huge failure,” he says, noting employers can make a simple change by moving to a “step-rate system.”
“It’s where you have a range,” he says. “The highest rate, say, is $10 an hour for a given job and then you have a set of steps below that and you hire people, say, at $8 and then they go to $8.50 and then they go to $9 and then $9.50 and then $10 after fixed period of time.”
The benefits of a program like this is employees can see when their increase will take place and exactly what they will be getting. They can work toward it as if it is a goal, he says.
Another change companies can make is the date of the increase. If companies scrap the idea of a communal raise date and give employees a raise on the anniversary of their date of hire, the raise is more closely tied to their personal performance, he says.
“Having it on their anniversary date would have it more tied to their objectives and make it more meaningful for them,” he says.
Raising wages on a communal date — as is the case with many traditional merit pay programs — doesn’t encourage employees to perform better, he says.
“One of the issues with the common date is that everybody’s rushed to do the performance appraisals and then they get done quickly and badly. Usually everybody tends towards the median and gets rated satisfactory,” he says. “They go through the motions of doing a performance appraisal, but there’s really no differentiation of performance and therefore no differentiation in merit pay.”
Claudine Kapel, principal of Toronto-based compensation consulting firm Kapel and Associates, agrees that across the board increases might not increase employee results within a business. They could even cost the company more.
“Over time, some people can start being paid outside of a structure or well-beyond the market rates for a job,” she says, suggesting employees be rewarded using a merit matrix.
“Typically, if you’re using some sort of a merit pay process, you’re considering both individual performance as well as how that individual is positioned with his or her salary range,” she says. “That can help the organization make the most of its compensation dollars, while keeping pay levels from getting out of hand.”
Tyson believes the term merit pay and pay-for-performance should not be used synonymously. Merit pay is the salary increase based on an employee’s performance rating, while pay-for-performance is a broader term encompassing any compensation plan that awards employees, either individually or in groups, for changes in their performance, he says.
“If you accept that definition, things like profit sharing or team bonuses or commission plans become forms of pay-for-performance. They’re not merit pay,” he says. “You can use other forms of pay-for- performance to motivate people to work harder and/or smarter.”
One way to achieve this is by allowing managers freedom as to when an employee is rewarded, he says.
“Normally, it’s one year — it’s as common as dirt,” he says. “I say give the managers some discretion.”
Allow managers to grant wage increases after 11 months, Tyson suggests. If employees know there’s a possibility to receive an increase earlier than their anniversary date, it may motivate them to produce better results, he says. Alternatively, the wage increase can take place after 12 months if the employee isn’t performing as well as they’re expected to.
“They can say, well, you’re a little better than most of the average people, so I can move your increase up a month or two months ahead of everybody else,” he says. “Therefore there’s a little more recognition of merit.”
Employees at SumAll are each categorized into one of nine fixed salary brackets. They have the opportunity to move up a bracket four times a year.
“We have quarterly development meetings, and in each of those meetings, you can be considered to go to a new band,” he says, noting most people see one increase annually, but there have been instances of employees receiving four increases in one year. SumAll’s employees are also rewarded based on company results.
“We have somewhat team-wide, agreed-to objectives for the business and as those objectives are achieved, every band gets a raise,” he says.
Being more open and honest with employees has proven business results for SumAll, Atkinson says.
“We were actually stunned that it’s not more universal,” he says. “Once you experience an open market — which having transparent salaries really is — there seems to be almost no motivation to go back into a closed environment.”