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Merit pay - the hoax.

Merit pay -- the compensation reward that is added to annual pay -- professes to incent performance and thereby contribute to mainstream increases in productivity. However, upon closer scrutiny, I believe merit pay systems are flawed by their very nature and cannot work effectively as rewards for past performance.

Moreover, merit pay systems conceal fundamental issues of effective management, providing supervisors with a means of escape from the proper practice of their authorities, accountabilities and leadership to subordinates.

As specialists in what we call Management Architecture, our firm designs and implements "requisite organization" systems for medium to large sized corporations. Requisite organization, based on 40 years of rigorous scientific inquiry conducted by renowned management scientist Elliott Jaques is a proven management structuring process focusing on the true nature of work, human cognition and creativity -- conditions which are "required" to produce optimal results.

Part of our firm's work involves the design of compensation systems which are congruent with the general principles of requisite organization. As such, we are familiar with merit pay systems presently being used by businesses and associations.

Most recently, I worked with a client to examine its merit pay system, designed as a critical part of the company's reward and recognition process. Like most companies, employees received merit pay increases (from 1.5 to 3% of gross pay) based on the performance appraisals of their past year's work. The process included performance appraisal meetings, followed by merit pay recommendations submitted to Human Resources. HR would then advise the next management level as to overall fairness and prepare summaries of increases for the company as a whole. Managers would then meet with employees to inform them of their pay increases.

The employees' general assessment of merit pay is aptly summed up by the following quote from Edward E. Lawlor, a well known authority on employee motivation and reward practices: "The difference in merit pay between the outstanding and poor performers is so small that there's no incentive value at all. Not to mention the fact that it's so unclear how a person got a higher or lower raise that it takes an enormous leap of faith, or stupidity, for an employee to decide that pay and performance are really related."

The assumption is that merit pay will reward good performance and also be an incentive for its continuation. I conclude that it has been wrongly conceived and thus, cannot help but be wrongly implemented.

It has likewise allowed us to pay insufficient attention to breakdowns in managerial authority and accountability. In short, it depends on the reward to produce an effect rather than planning and designing the effect at the outset.

To realize the fallacy of the merit pay system, we first must understand the underlying commitment merit pay represents, what kind of performance we are discussing and the various ways for which performance is compensated.

So, what is the commitment of merit pay? It is a promise to pay money to an employee by a manager authorized to do so. As a reward, it is a payment for a past event, implying that the increase should be paid in perpetuity as long as the employee functions in the same role, at the same level of performance and, of course, the company has the ability to subsidize the program in the first place. If this is a promise to pay for past performance, is it not an annuity, meaning that the employee is "entitled" to it regardless of future performance?

If merit pay is interpreted as a reward for past performance, why do we assume that we are paying for a continuation of the level of performance reviewed in the year upon which the increase was based? This is a critical distinction because the promise to pay is grounded on the evidence of the past period. It is not a payment for it. It is the same as a promise to pay a new employee a certain amount of money based on an assessment of the person's capability to do the job for which he/she was hired. This promise to pay is no more an incentive reward than any promise to pay for specified services to be rendered. To say that all payments are rewards generalizes to the degree that the use of the term "reward" with respect to merit pay is completely debased.

This confusion between reward for past performance and promise to pay for future performance undermines the integrity of the employee's role. If the promise is for the future (which I believe it cannot be otherwise) then the issue is future performance and accountability.

Therefore, the increase in pay should be tied to future performance for it is the standard which will ultimately have to be satisfied in a contract of accountability. This is much more than semantics; it alters the entire meaning of merit pay as defined in traditional management terms.

I would propose an operational definition of merit pay as a promise to pay an increased amount of salary to an employee by his/her manager authorized to do so, in exchange for a promise made by the employee to perform satisfactory future work of a specified and mutually agreed upon complexity. In this context, the future is brought to the forefront against a background of the past, not the other way around.

Performance would then be based on "work complexity". All things being equal, the greater the complexity of the work, the higher the pay. Otherwise, any concept of fair pay is doomed from the start.

Dr. Jaques' research demonstrates how we pay for work according to its complexity and how we can measure it. His definition of work is "the exercise of independent discretion and judgment to accomplish an assigned task." This definition is unique to human action and discerns work of people from a horse pulling a cart. In short, independent discretion and judgment are the very essence of human enterprise.

According to Dr. Jaques, a task is an output based on a specified quantity and quality, as well as a targeted completion time. Without the latter, neither work complexity nor performance can be determined; a "what by whenever" does not prepare the employee to make a valid promise to accomplish a task. Further, properly measuring the complexity of work through time spans (i.e., how long it takes to complete a task), enables managers and subordinates to agree in advance on the degree of discretion and judgment required to make the promise. (Of course, before this is even discussed, the manager must determine to what degree this increased scope of independent judgment and discretion will add value.) If no increase in the complexity of work is warranted, then the manager must not make a promise to pay nor elicit a promise from the employee to perform at this higher level, regardless of past performance. In fact, if the employee is capable of handling increased complexity which is not required to get the task done, this becomes an issue for career counseling and mentoring, not merit pay. We experience this situation quite often and misinterpret it as a breakdown in the merit pay system. An employee does exceptionally well at his/her job and continues to receive merit pay increases for past performance. Eventually, the employee reaches the top of the pay band and there is no room left for merit increases.

Linking pay increases overtly to future performance and the company's requirements for work of a given complexity removes the veil of suspicion from merit pay. It puts accountability where it should have been in the first place -- the design and execution of tasks planned into the future.

Merit pay really doesn't exist. It never did. Wrongly construed, it diverts our attention from the real issue of productivity -- the design and accomplishment of work.

Pay for work is the basis for discussion out of which true accountability emerges to shape the future. It can occur in the same spirit as the first day on the job, provided the organization understands that some employees outgrow their jobs. We must understand what really counts at work, shifting our discussion from "what you did" to "what you can do". This is what pay increases are all about.

Don Brookes is director of the Canadian Regional Office of Harding Consulting Group located in Toronto, Ontario. The North American management consulting firm also has regional offices in New York, Miami and Houston.
COPYRIGHT 1992 Canadian Institute of Management
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Title Annotation:redefining the merit pay system
Author:Brookes, Donald
Publication:Canadian Manager
Date:Sep 22, 1992
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