Dow Scott, Ph.D., Performance Development International, LLC
Merit Pay Program Design and Effectiveness
September 18, 2014
Presented by:
Rena Somersan
Principal
Verisight, Inc.
Dow Scott, Ph.D.
Performance Development International, LLC.
Verisight delivers differences that count…
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Retirement plan compliance
and administration
Compensation consulting
Health and welfare
consulting
Retirement consulting
Actuarial consulting
ESOP consulting
Government representation
and reporting
Surveys and benchmarking
Employee Education
Flex plan services
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Dow Scott, Ph.D.
Performance Development International, LLC.
Overview
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Survey conducted June/July 2014
Conducted by Verisight in conjunction with Dow Scott, Professor, Loyola
University - Chicago
Participation solicited from clients, prospects, and local HR/compensation
associations
More than 200 participants
Diverse industries, organization size, and ownership
Presenter – Rena Somersan, Principal, Verisight
Brian.Repsold@verisightgroup.com – 414-236-0470
Rena has more than 20 years of consulting experience linking organizational strategies with
desired human capital performance and outcomes. Typical engagements range from developing
compensation systems and variable pay plan design, evaluation of performance management
system effectiveness, to benchmarking human capital trends. Rena’s lived and worked in Japan,
and while living in Istanbul Turkey, has experience implementing compensation systems there
too.
verisightgroup.com
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Dow Scott, Ph.D.
Performance Development International, LLC.
Industries
Percentage
Response
Industry
Manufacturing/Wholesale
22%
Healthcare and Social Assistance
14%
Professional, Scientific and Technical Services
14%
Finance and Insurance
10%
Services (Other, except Public Administration)
5%
Retail Trade
4%
Educational Services
3%
Utilities
3%
Information
2%
Transportation and Warehousing
2%
Other
21%
verisightgroup.com
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Dow Scott, Ph.D.
Performance Development International, LLC.
Company Size - Revenue
Company Size- Revenue
Percentage
Response
Less than $50 M
17%
$50M to less than $100 M
10%
$100M to less than $500 M
13%
$500M to less than $1 B
16%
$1 B to less than $5 B
29%
$5B+
16%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Company Size - Employees
Fewer than 100 employees
10%
100 to 499
16%
500 to 999
9%
1,000 to 2,499
2,500 to 4,999
18%
8%
5,000‐9,999
12%
10,000 to 19,999
10%
20,000 and over
15%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Ownership Status
Privately owned company
40%
Publicly traded/listed company
33%
Not-for-profit
Government or public sector
Other
23%
2%
2%
verisightgroup.com
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Dow Scott, Ph.D.
Performance Development International, LLC.
Self Assessment of Company Performance
Top 20th percentile
33%
60 to 79th percentile
33%
40 to 59th percentile
20 to 39th percentile
Bottom 20th percentile
31%
3%
1%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Merit Pay Program Coverage
All employees in your organization
63%
All salaried or exempt employees
25%
Only managerial and professional
employees
All exempt union employees
12%
0%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Merit Pay Program Goals and Effectiveness
How Important are Merit
Program Goals
How Effective are Merit Pay
Programs at Meeting Goals
Not
Marginally
Not
Marginally
Important
Effective
Important Important
Effective Effective
Communicates to employees that the contributions they have made to the
organization or department are appreciated
3%
8%
89%
8%
25%
67%
Motivates employees to perform at higher levels
2%
12%
86%
10%
32%
58%
Motivates top performers to stay (i.e., retention) by giving them larger
relative pay increases or positioning them toward the top of pay ranges
3%
12%
84%
12%
27%
61%
Communicates to employees that the organization has a performancedriven culture (i.e., meritocracy)
8%
8%
84%
9%
29%
61%
Enhances employee perceptions of pay fairness by rewarding merit
4%
13%
83%
12%
29%
59%
Rewards the accomplishment of specific organizational behavioral
objectives, such as teamwork or customer service
6%
12%
82%
10%
32%
57%
Forces managers to distinguish high performers from low performers for
allocation of limited merit increase budgets
10%
10%
80%
11%
28%
60%
Attracts high performers (i.e., recruitment) to the organization
18%
18%
64%
25%
31%
44%
Motivates poor performers to leave (or improve) by giving them lower relative
pay increases or positioning them toward the bottom of the pay range
15%
28%
57%
28%
41%
31%
26%
27%
47%
21%
29%
50%
60%
25%
15%
54%
32%
14%
Adjusts the pay structure to accommodate annual or bi-annual labor market
increases, so high performers populate the top of the range and poor
performers and new employees populate the bottom of the range
Discourages average or low performers from applying for jobs in your
organization
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Dow Scott, Ph.D.
Performance Development International, LLC.
Effectiveness of Performance Criteria Used to Award Merit
Increases
Frequency of
Not Effective
Use
Marginally
Effective
Effective
Very Effective
Communicates employee contributions
99%
6%
29%
51%
14%
General competencies or behaviors associated with most jobs (e.g.,
leadership, timely response to work demands, meets goals on time,
works well with team)
91%
2%
25%
58%
15%
Accomplishment of performance goals set for the job or person in the
job
90%
3%
22%
56%
19%
Accomplishment of the job duties listed in the job description
80%
5%
30%
56%
9%
Exhibiting behavior associated with effectively performing the specific
job (e.g., behaviorally anchored Rating Scales – BARS)
59%
7%
26%
52%
15%
Open-ended: performance essays or discussions
48%
5%
34%
53%
7%
“360 degree” feedback
24%
15%
29%
44%
13%
Team rating instrument
12%
17%
35%
35%
13%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Responsibility for Rating Employee Performance
The employee’s direct or immediate supervisor
92%
Department head or manager, even if they are two
or more levels above the employee
3%
“360 degree” or multiple raters are used to score
employee performance 2%
Other
3%
verisightgroup.com
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Dow Scott, Ph.D.
Performance Development International, LLC.
Characteristics of Performance Appraisal and Performance
Management Process
87%
Requires supervisor and managers to tell employees their performance ratings
56%
Uses online software designed for rating employee performance
50%
Requires that supervisor and managers receive training
Uses a paper process which may incorporate MS word or excel types of
software
43%
Conduct performance calibration meetings to review performance ratings
across departments
38%
33%
Roll-up process so supervisor ratings are compared to others at higher levels
Requires employees to receive orientation or training on the performance
appraisal program
29%
Requires supervisor to make a forced ranking or force distribution where only
a limited number of top performance ratings can be given
Other
20%
3%
verisightgroup.com
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Dow Scott, Ph.D.
Performance Development International, LLC.
Performance Rating Scales
Percentage
use
Scale
Four or five-point scale
77%
Three-point scale
10%
Other or multiple scales
8%
Performance ratings are not used to determine merit
increases
5%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Distribution of Performance Scores
Percentage
Use
Most people fall into the middle with a bell-shaped; distribution around
the middle
50%
Spread is skewed towards higher performance ratings
39%
Spread is skewed towards lower performance ratings
0%
Employees are approximately evenly spread across performance ratings
1%
Do not track this information
9%
Other
1%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Method Used to Budget Merit Increases
Percentage
Use
Budgeted in advance as a percentage of payroll based on predicted revenues and
what other firms are budgeting for merit increases
79%
Discretionary funding (i.e., the merit award pool) is typically decided by
management just before awarding the merit increases based on affordability,
turnover, etc.)
17%
Self-funded through reduced costs or increased revenues/sales (i.e., the increase is
typically driven by a formula established in advance)
1%
Other
2%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Determinants of Merit Budget Size
Not Important
Marginally
Important
Important
Affordability; given labor costs and expected revenues
3%
3%
93%
Success of the organization in meeting its profit margins,
revenue, sales, or other financial goals
3%
6%
90%
Survey predictions (such as SHRM or World at Work, etc.) of
the amount other organizations are budgeting for merit pay
increases
12%
11%
78%
Ability to attract and retain employees
8%
19%
73%
Amount required to keep the organization’s targeted position
in the labor market (e.g., 50th percentile)
14%
30%
56%
Conduct informal survey of competitors and/or own industry
33%
28%
38%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Merit Increase Award Schedule
Annually, on the same date for all employees (focal
date)
82%
Annually, but not on the same date for individual
employees; could be based on employee…
Depends on the performance of individual
employee; can range from a few months to more…
More than once a year
Other
11%
2%
1%
4%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Adjustments Made to Salary
Merit pay increase rolled into base salary
based on individual performance
82%
Market adjustments (pay is increased to keep
up with market pay)
59%
Increase/adjustment based on position in
salary range
35%
Cost of living adjustment to keep employee
pay at least partially whole in regards to…
7%
Increase in salary or wages based on
organization performance
6%
Other
12%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Merit Pay Increase Information Provided to Employees
Percent
Used
Size of the merit increase or the amount of the new salary
94%
The position the employee now has in the range
31%
Average increase given to all employees
10%
The range of rewards for different levels of performance
7%
The amount of the merit increase that other employees received
2%
Average increase given to team or department
1%
Other
6%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Criteria Used to Evaluate Merit Pay Program
Not
Important
Marginally
Important
Important
Very
Important
6%
10%
41%
43%
6%
15%
53%
26%
16%
13%
38%
33%
7%
22%
47%
23%
Employee turnover
8%
28%
44%
20%
Administrative efficiency of the appraisal process
13%
29%
45%
14%
Rating of your company (e.g., Fortune’s most
admired companies)
57%
23%
15%
6%
Employees understand the merit pay program and
how their increase was awarded
Satisfaction of managers or supervisors with the
merit pay program
Company/organization overall performance such
as total shareholder return, revenues, etc.
Employee satisfaction with pay or merit pay or
perceived justice
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Dow Scott, Ph.D.
Performance Development International, LLC.
Use of Merit Pay Guide Chart (increase matrix)
Management Use of Merit Increase Guide Chart
Yes
58%
No
42%
Individual performance score
91%
Position in range
Length of time since last
merit increase
Other
verisightgroup.com
72%
10%
6%
22
Dow Scott, Ph.D.
Performance Development International, LLC.
Software Used to Administer Merit Increases
Microsoft Excel or other spreadsheets
40%
HRIS software, such as People Soft with merit pay
add‐ons
27%
Specialized compensation software that allows for
merit pay administration
16%
Performance Appraisal software with merit pay add‐
ons
Other
verisightgroup.com
11%
8%
23
Dow Scott, Ph.D.
Performance Development International, LLC.
Variation in Merit Pay Increases
Base salary increase is not based on
performance
5%
Everyone receives approximately the same
increase
13%
Small variation (increase for top performers
is 1.25 times the average)
27%
Moderate variation (increase for top
performers is 1.5 times the average)
35%
Considerable variation (increase for top
performers is 2 times the average)
Extreme variation (increase for top
performers is at least 3 times the average)
20%
2%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Variation in Merit Pay Increases
Across all levels, high performers received an average salary increase of 4.8 percent, up from 4.0
percent the prior year.
4.8%
High Performers
4.5%
2.9%
1.5X
Satisfactory Performers
3.0%
1.8%
Low Performers
2.1%
Source: 2013/2014 Verisight/McGladrey
Compensation, Retirement, and Benefits
Trends Report.
Mean
Median
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Dow Scott, Ph.D.
Performance Development International, LLC.
Merit Increase Amounts
Year
Average
Range
2012
2.7%
0-5.0%
2013
2.7%
0-5.0%
2014
2.9%
0-6.0%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Pay Structure Adjustment Frequency
Not consistently adjusted OR as needed
based on market conditions
23%
Less than once every two years
5%
Once every two years
12%
Once a year
Multiple times per year
We don’t have a salary structure
47%
0%
12%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Pay Structure Range Spreads
No salary ranges
15%
Less than 30%
10%
30‐49%
22%
50‐69%
40%
70‐99%
9%
100%‐149%
4%
150%‐199%
1%
200% or greater
1%
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Dow Scott, Ph.D.
Performance Development International, LLC.
Questions?
Rena Somersan
Principal
Verisight, Inc.
Rena.Somersan@verisightgroup.com
414-236-0470