Why Merit Pay Sucks

Like Meryl Streep, merit pay has many faces. Aside from the traditional teacher model, business offers all variety of merit pay including incentive pay, performance reviews, profit sharing, etc. Ironically, the strongest programs focus on less-than-tangible measurements, and in the right hands and context, that makes sense. But for purposes of me being able to make my point, merit pay this day is referring to bonuses applied to the most tangible and least forgiving measure: profitability.

 

Anytime we receive dollars over and above our standard compensation, it not only doesn’t suck, it’s marvelous, but my beef with profit-based, merit pay is all about its lack of relativity. In many cases, merit pay simply serves as an evil twin for the economy, paying dividends when times are good and ignoring hard work and enterprise when times are bad. As Rochefoucauld said, “There is a season for man’s merit as well as for fruit,” and unfortunately for those paid by the bottom line, they are one and the same.

 

Under most merit pay scenarios, one can work less hard, be less enterprising, and frankly coast through fat economies, yet still be paid oodles more money. Look no further than the bank and Wall Street bonuses the past decade. The economy enjoyed heavy retail, technology, and manufacturing growth. The housing market was busting at the seams, home prices were at record levels, company profits were soaring. And so were bonuses. Many of those who benefited had little to do with improved margins, but fortunately for them they were along for the ride.

 

It’s safe to say in rough times, management works harder, makes more difficult decisions, employs more creativity and innovation, and is more entrepreneurial about business acquisition. Yet in the face of declining profits, how many of you received merit bonuses for your efforts? I would imagine very few.

 

Merit pay is fundamentally a misnomer. Bonuses received around merit pay really have very little to do with “earning” one’s keep. For those who willingly chase the carrot, challenging economic times eliminate any possibility of performance bonuses, diffusing and deflating energy, and actually inhibiting behaviors necessary to squeeze every last dollar out of an already shrunken and depleted marketplace.

 

How about a new standard that takes the relativity of true performance into account, particularly in hard times. To throw large bonuses at managers and staff only in the good times makes no sense. It only serves to encourage low morale and bunker mentalities, attitudes that classically run counter to what is required in business to make good things happen.

 

It’s a shame those who were taught from a young age to “earn it” often walk away empty-handed right about the time they think they nailed it.

Comments

[loose]

Great comments, Dave and Ron. Thank you for the clarifications and intelligent perspectives.

[Dave]

I agree with you that coupling bonuses to a profit target is simplistic and rarely reflects truly "merited" compensation. But when you speak of "bonuses", you speak to a small elite. The vast majority of salaried or hourly wage earners have no experience with bonuses, and I'm pretty confident have little sympathy for the plight of the executive. They are relegated to hoping for the increasingly rare "raise", often termed "merit increase", which in the past decade has been non-existent or perhaps for the lucky, in the 2% range. This spawns not just low morale, but anger. The view looking up at the executive suite is "thems whats gots keeps" and the income gaps ever widen, which is one reason I view with some chagrin the attack on unions.

[Ron in Alexandria, MN]

I am familiar with the concepts of merit pay and bonuses - and am a fan of both. It the top people in the organization are receiving a bonus, I believe everyone in the company should as well. Likewise, in determining individual raises using merit (performance) is not inherently unsuitable or ineffective. But I am unfamiliar with the context and linkages with which you are using them - in fact as you describe their intertwinement - it sounds discombobulated, dangerous and rife with consequence imbalance. There is a profound difference between effort and results (both ways) especially during times where economic misfortune makes for tough business navigation. The law of compensation (AKA the law of prosperity) states that what we make, as a business and as individuals is in direct proportion to the quantity and quality of the services (output) we deliver. A high performer in a poorly performing business can hope for little more than surviving for another day, or a new job. A low performer should be challenged to elevate performance or find a new job, even in a wildly successful company. Finally, whatever people do with regards to compensation – remember the 3 B’s: Be fair, Be consistent, and Beware.