I’m working on creating a new management system for our non-management employees. Is it advisable to give merit pay to people with average work performance? Why or why not? — Pink Panther.
My answer is the same answer I would give to organizations that recognize people for perfect attendance. It’s not an answer, but a question, so that these organizations may realize the folly of their ways. Why would you give out perfect attendance awards if workers who are required to report for work (either physically or virtually) and on time?
In other words, aside from salary and benefits, why reward people whose interest is to be “present” eight hours a day. In this country, the perfect attendance award is of little comfort to workers, who suffer a lot in the absence of a decent mass transport system.
Who cares about receiving free t-shirts or coffee mugs signifying perfect attendance? Big deal! That’s the reason why companies here have absence or tardiness problems. Unless you can go beyond the tokenism your recognition system seems to value, then your attendance award is all for nothing.
Professor Jeffrey Liker in “The Toyota Way” (2004) believes, i.e., “a splashy reward system” if worker attendance is critical to your company. In many Toyota factories in the US “those who make the perfect attendance club are invited to a big banquet at a major convention center. About a dozen brand-new Toyota vehicles are then paraded on stage. Winners selected by lottery drive home the vehicles with taxes and fees all fully paid.
“About 60% to 70% of Toyota associates (workers) get into the perfect attendance club — not a single day of missed work or lateness. The total cost of this one-night extravaganza to Toyota for getting thousands of associates to come to work on time every day is peanuts.”
PAY FOR PERFORMANCE
Pardon my over-reaction to the perfect attendance award. That’s only to emphasize the point that you need to focus your attention on creating and strengthening a robust pay-for-performance system. So, to answer your question, I would say it is not advisable to give merit pay increases to average performers.
If you did that, a time will come when you are saddled with average workers who come and go for their usual pay and perks without any motivation to exceed expectations. In addition, when creating a pay-for-performance system, remember the following:
One, have an objective performance appraisal system. This is very important in this country. In my experience, many managers prefer to give average ratings to workers who should have been booted out a long time ago. For reasons of camaraderie, familiarity, and compassion, they avoid creating difficult relationships with their workers.
Two, establish a robust salary scale and structure. This is a prerequisite to managing for performance. It should be the first thing to do before hiring your first employee. This sets price ranges for various job grades — for example grade one (entry level) to grade ten (for those preparing to hold a supervisorial post). It’s also important that the rates are roughly within industry standards to keep turnover low.
Three, consider inflation. If the average rate is 4%, then consider that the minimum increase for those who exceed performance standards. Other factors you need to consider like job’s importance and the difficulty of finding replacements for people with “hot skills.” For these, you may have to give an additional 10% to 15% minimum increase.
Last, monitor cases of ‘red circle’ pay. This happens when line managers, for fear of being unpopular, give merit increases to below-standard workers. If this happens, line executives must consult their human resource (HR) department before recommending any pay increase. One solution would be to assign additional tasks to the worker to reconcile the pay level with the salary scale.
This list is not complete. There are many objective approaches to help you measure performance. Therefore, when a line manager uses the word “average” to describe a worker’s performance, think twice. Then compare how the manager rates workers with how you would assess performance. Chances are, they won’t line up.