Interview questions and structured interviewing
Username: Password:

Non-Traditional Merit Pay Alternatives

Today's competitive business environment creates many challenges for those responsible for managing employee compensation. For nearly a decade now, business has been downsizing, rightsizing and outsourcing to minimize business expenses and maximize shareholder profits. Shareholders are expecting continuing high returns on their investments. At the same time, many industries are facing increased global market pressure. Add to this mix quickly changing technology, customer expectations for nearly instantaneous responsiveness, heavy competition for entry level workers, a 3% or 4% merit adjustment trend, and exploring non-traditional merit rewards becomes mandatory.
In the past, when budget dollars became tighter, organizations opted for what appeared to be simple solutions like delayed salary increases, no salary increases, or below market increases. However, with the lowest unemployment rates in decades, these traditional solutions cause as many problems as they solve. In a tight marketplace, employers using this strategy have found it hard to retain their best employees or to recruit qualified new staff.

How can employers use the 3% to 4% merit increase budgets to their maximum advantage? First, consider capping salaries at the market rate and providing a lump sum payment, instead of an increase to base salary for employees already above the market rate. Alternatively, establish a two-teired pay system with an entry-level rate and a senior rate. Increases beyond the senior rate would be lump sum payments. The entry-level and senior rates would be adjusted any time the market moved up.

Small percentage increases seem to disappear by the time it is spread out annually and taxes are taken out. A 4% increase on a $30,000 annual salary comes out to about $25 semi-monthly. However, that same dollar amount would be $800-900 on a one-time lump-sum payment. The same amount of budget dollars seem to have a greater impact in this case. To minimize market position erosion, consider mixing a lump-sum payment with a small increase to base salary.

Consider merit increases with variable timing which increase base salaries every 15 to 18 months rather than every 12 months. This system provides larger and more frequent increases for good performers, with moderate performers receiving smaller, more infrequent increases. Shift the focus from cost-of-living to market competitiveness. In the past employers have talked about cost of living adjustments and pay increases in the same breath. Those of us who have lived through the double-digit inflation years know what a foible this can be. Instead, explain the organization's philosophy in terms of market position. Studies have shown that employees tend to overestimate others' income levels, so be as open as possible with summary data that will not breach individual confidentiality.

Remind employees that responsible organizations must watch for good value in materials and supplies, as well as the workforce. Just as a responsible employer would not pay $3 each for basic ink pens, a responsible employer will not pay significantly above market for the telephone to be answered. That type of action would put everyone out of work very quickly. Employees are savvy consumers and understand that there is a limit to what an employer will pay for an ink pen and there is a limit to what employers can pay for a receptionist.

As with any compensation plan adjustment, remember to consider how the changes will impact other elements of your total compensation plan. Effects on hiring practices, promotions,transfers, job evaluation and incentive systems need to be considered before implementing a change in your basic compen


Finding Candidates

Interviewing Basics

Interviewing Best Practices

Laws & Documentation

Line Manager / Recruiting Partnership


Pre-Planning & Retention

Reading the Candidate

Recruiting Basics

Recruiting Best Practices

Useful Links