HR Pulse - Spring 2008 - (Page 39) Flaw 2: Elements influence performance appraisals that truly have nothing to do with performance. We mentioned the common psychometric errors. However, with merit pay, these problems are compounded. Consider just a few rating errors impacting performance appraisals that will further distort merit pay: a. Employees with higher seniority are rated higher even though their performance is objectively no higher than those with shorter seniority. b. Employees with more difficult jobs are rated higher even though their performance is objectively no better than those with easier jobs. c. Those who “brown nose” receive, on average, roughly 5 percent more pay than those who don’t. In addition, relationships with coworkers are seriously damaged—co-workers very much resent the difference in pay and the reason for the difference. In effect, merit pay actually encourages dysfunctional behavior and damages co-worker relationships. and he/she decides who gets what. In most merit pay systems, in order for one person to get more than 3 percent, someone else has to get less. The problem is that sometimes all employees are high performers (or all are low). If a compensation model was adopted in which everyone was given as big a raise as was warranted by their performance appraisal (e.g., if everyone’s performance was such that they all rated high, all would get the maximum raise), this problem would go away. Unfortunately, merit pay systems rarely are administered in this manner. Flaw 6: Merit pay’s inherent design, at its best, does not promote cooperation and collaboration among employees. At its worst, it discourages it. Due to the zero-sum nature of financing merit pay, this approach to compensation does not work well in environments in which high levels of teamwork are encouraged. Helping someone else to perform better could lead to an employee actually getting a lower pay raise since the help he/she provides might lead to the other person getting a larger raise. That person’s larger pay raise comes out of someone else’s raise (it is zero sum); it actually could come out of the pay raise of the employee who is helping that person. As such, the incentive is to not provide help. In fact, it could be argued that there is incentive to ensure that colleagues do not perform well. Flaw 3: Merit pay includes something of an “annuity.” If a person performs well this year, the higher pay they receive is provided indefinitely. In fact, their performance may drop precipitously next year, but their pay does not shift downward. As such, they are rewarded indefinitely for one year of good performance. This feature truly is inconsistent with the notion that pay is linked to performance. Rather, it suggests that pay potentially is linked with long past performance but not recent performance. 39 HR Pulse Spring 2008 Flaw 7: Merit raises tend to be too small to motivate behavior changes. There is evidence that it takes roughly a 10 percent difference in pay to get a behavior change. Few companies that use merit pay make that big a distinction in pay. It’s not uncommon that the difference in pay raise between a good performer and a poor performance is just a very few percent. Flaw 4: In the long run, many managers get to a point that they just rate everyone the same thereby generating the same raises for all. They don’t like the hassles that come from giving lower wages to some than others. Moreover, it is not uncommon that managers will state that they did not believe that the performance appraisals systems were good enough to support merit pay decisions (and, as noted above, they likely are correct). Flaw 8: Those employees who become disgruntled due to the aberrations of merit pay will have lower job satisfaction. This often results in higher absenteeism and attrition from the organization. At a time when we’re facing even larger shortages of recruits than we already are, we don’t need to be doing anything that will make our labor supply less available. Flaw 5: Merit pay plans typically are funded in a zero-sum manner. That is, a manager is given, for example, 3 percent with which to give raises >>
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