We don't hear much about COLAs any more. Wage-price geysers boosted by double digit inflation closed out the 1970s with the beginning of the end for COLAs...or so we thought.
I Get How Much?
Instead of COLAs, we now have merit pay that's supposed to give better workers a big "rah rah" for their hard work and for those holding back a little encouragement. Here's how it works: Company leaders decide to pay the going merit rate based on what everyone else is giving -- usually 2-4 %. The HR department tells department heads how much they're allotted and demands that they maintain the approved merit rate as an average. Supervisors then stress about making time to fabricate explanations in the form of performance reviews for the raises they want to give and agonize over how people will respond when they give them the news. After hours upon hours of calculating, re-calculating, comparing salaries, and tweaking numbers, supervisors are ready to face employees.
In one department, workers making $10 per hour get called one at a time into the boss's office. The boss tells the first employee he's the best employee she ever had. The boss would really like to give him more, but the merit pay pool limits the department to an average of 4%. So the boss gives the worker a generous 6% increase putting 60 cents extra into his paycheck for every hour he works.
The next employee gets called in. The boss is glad she can always depend on her. She's a solid performer and always consistent. The boss tells the employee she's doing a great job and she's going to get a 4% merit pay increase. Since this employee also earns $10 per hour, she gets 40 cents more much like everyone else in the department who gets between 3 and 5 percent.
There is one exception: the department magician. This guy could make a fortune in Vegas with the disappearing act he uses when there's work to be done. The boss tells him she's sorry she can't give him more, but hopes that things will be better for the company in the future and she'll be able to give him a bigger raise next time. This worker gets a skimpy 2% raise which means he will have a whopping additional 20 cents every hour he's on the job.
A Motivator that Isn't
So the "best employee ever" is now making 40 cents more than the disappearing co-worker -- not particularly inspiring for someone working up a sweat next to the guy he's carrying every day.
For those who think merit pay increases motivate employees, think how much your motivation increases when you get a couple more percentage points than your co-worker especially when you worked nights and weekends to take care of things someone else was supposed to do.
A New Image
When we talk about getting rid of merit pay, the outcry is "But how will we reward our best workers?" as if the best workers are really getting rewarded in a meaningful way now. Truth be told, most businesses are really paying employees on a COLA system. Everybody gets essentially the same raise including those on salary. They're all around 3 or 4%, or whatever the going rate happens to be. A few cents here or a few dollars there really doesn't amount to anything significant to distinguish between high and low performers.
Since everyone is really being treated the same, why jump through all the hoops with paperwork, justifications, meetings, and debates about how to make sure the favorites get a little more? If we really want to reward great performance, there are a lot of good ways to do it including gainsharing, spot bonuses, and team rewards, among others. As for the merit pay system, call it like it is: A stressful, complex, and expensive way to pay a COLA.
Trying it on for Fit:
Gather data to provide you with the average merit pay increase and range of merit increases. Exclude pay increases influenced by promotions and assignment changes. Examine the numbers for each department. If the differences between employees generally amounts to a few percentage points, you are in essence paying a COLA. If so, consider eliminating the waste and consternation you're experiencing and simply administer it as a COLA.
If high performers are consistently receiving at least 10 percentage points more than the next level performer, you may have a system that truly pays on merit. You have at least some justification for your process since studies show a 10 point spread between employees can influence behavior.
Send an email and let me know what you learn from your experiences. I would love to hear from you!