Merit Pay Raises

Administering merit increases may be a traditional HR duty, but that doesn't make it simple to do in today's high-performance organizations. There are all sorts of issues to take into consideration. How big should a merit increase be? How should it be linked to performance? Should a fixed distribution scale be used? If so, what should that scale be?
In early 2001, HRI conducted an e-mail survey asking member companies, all of them large organizations, about some of the nuts and bolts of their merit pay programs. These findings, along with some figures from the Institute of Management & Administration's (IOMA) annual Setting and Managing 2001 Compensation Costs Survey, provide a quick snapshot of merit pay circa 2001.
The IOMA survey found that the average merit increase last year was 3.9%, lower than had been predicted and less than the 4.2% increase in 1999. The survey included responses from several hundred HR/compensation professionals from the U.S. and Canada. In the U.S., the highest increases occurred in the South Central region (4.1%) and the lowest in the North Central region (3.8%). In Canada, merit increases averaged 3.9%, higher than the expected 3.5% increase. Business service firms saw the highest increases (5%) and education organizations the lowest (3%). Smaller firms (up to 199 employees) provided the highest average merit increases (4.3%), and the largest companies (7,000 employees or more) handed out the smallest ones (3.7%), according to the IOMA survey.
The HRI survey received responses from 41 organizations. It found that the majority (83%) of these firms provide merit increases on a fixed date or dates, which vary from company to company. Most of these firms provide merit increases once a year, although two companies provide them twice a year. Among HRI responding firms, April 1 was the most common date on which people are given merit increases. Only six companies said they provide merit increases on a rolling basis, usually on the anniversary date of hire. One company notes that it uses a rolling date for its top execs and has a fixed date for everyone else.
The vast majority (93%) of firms require annual performance reviews to be completed before merit increases are awarded, although there are various levels of rigor in the systems. One respondent notes, "In theory, [performance reviews] are expected to be completed prior to merit [increases]; in practice it is never verified that the review has actually been presented." But another states, "No promotions or merit increases can be granted if there are 'holes' in the review cycle."
About a third of responding companies use a fixed distribution rating scale for merit increases. Twelve respondents (or 29%) said they use fixed scales, and several others say they are moving in that direction. One company recommends a distribution scale but doesn't mandate it. However, even among some of those who said their firms don't use such scales, there's a recognition that some distribution should occur. For example, one respondent writes, "There is no forced distribution, though people are aware of the concept of a normal distribution. We let the budget guide, though people can request more money. Also, there is a check against performance (financial, productivity, service quality, etc.) if a group comes in with a high percentage in the top category." Another writes, "We do not have a forced distribution. However, we force more discrimination in ratings through merit guidelines."
Among those that do have a fixed distribution scale, the most common scheme is 10-80-10, or 10% at the top, 80% in the middle, and 10% at the bottom. There are many other variations, such as 15-70-15, 5-75-20, and 10-40-45-5. One respondent notes that employees are assigned a rank group percentile of 1% through 99% and that merit pay is based on this.
Such details suggest that even as HR professionals increasingly take on the role of strategic thinkers, they must keep up to date with the complexities of traditional duties such as administering merit pay.
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HRI's merit pay raise survey was conducted on behalf of one of our member organizations for benchmarking purposes. We appreciate the efforts of those who took the time to participate in the short survey.
For more information on the IOMA survey, please see the following article: "Latest Data on This Year's Merit Pay Increases," HRfocus, December 2000, pp. 4-7. IOMA's Web site is located at
http://www.ioma.com/