It’s All About Pie – Merit Increase Differentiation

No, I’m not talking about Pi (π), the mathematical constant commonly approximated as 3.14159.  I’m talking desserts – apple, pumpkin, blueberry, cherry, etc.  Who doesn’t like pie?  When it comes to merit increases, it’s just like pie, and everyone wants a piece.

Over the years, I’ve been a part of many salary/merit increase cycles. Some of these cycles were in good years, where the merit budget got spread around like peanut butter (or peanut butter pie).  And, some cycles were in some not so good years, where the salary increase budget was almost nonexistent.

As difficult as those not so good years were, some valuable lessons were learned. It forced the organization to prioritize and truly differentiate.  Instead of a very small spread between the highest and lowest merit increase, the increase was either zero (nada, nothing) or significant (in the 10-20% range).  There were many employees who did not receive a merit increase.  That forced the organization to look beyond the annual performance reviews and ratings, and really get to know their key talent.

How does an organization do this? Well, the fact is, meaningful differentiation and management of a small merit budget is difficult work. Especially in a global organization where Works Councils or Unions have the final say on how much (or little) you can increase salaries.  To pull this off successfully takes discipline and commitment from all levels in the organization in order to be able to deliver tough messages.  In addition, front line managers need to be equipped with a script to communicate consistently and manage employee expectations.

But let’s not get ahead of ourselves. Equally as important as the messaging, is the organizations commitment to invest in evaluating its talent.  Not every single employee needs to be evaluated, but time should be spent getting to know your critical talent and key employees.  Who are the critical/key employees?  They are the ones who can impact the future success of the organization.  They are your effective leaders/mentors/coaches, your “rainmakers”, your cost savers and your idea generators.   If you don’t know who these employees are, you need to find out.

The review of critical or key talent is not a “once and done” activity, it is something that should be incorporated into an organizations normal annual review activities. Time needs to be set aside to assess and evaluate employees that are critical to the success of the organization.  In addition to time, internal resources may need training on structured interviews in order to effectively assess talent.   The benefit of these activities can far surpass the investment, especially where decisions regarding merit increases or other reward programs are concerned.  Think about it. Why not make an investment in getting to know your key talent more comprehensively before investing in a merit increase, annual incentive and/or long-term incentive award for those employees?

Recently, the hot topic has been for companies to consider abandoning annual performance reviews, which would certainly impact the old methodology used to make decisions about merit increases. Before abandoning these programs, I suggest that companies review the investments being made in all employee programs (be they compensation-based or otherwise) to assess the costs and benefits and to weigh the pros and cons of each program.  Once that assessment is complete, companies can then decide which programs are worthwhile keeping and which ones can be eliminated.

What is your organization doing to differentiate more? Have there been discussions about eliminating annual performance reviews?  How is your company approaching 2017 merit increases?  What are the merit plan considerations for 2018 and beyond?  With merit increase season upon us, I’d love to hear your thoughts on this topic.  Please comment on LinkedIn at

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