Published: Feb 19, 2020Time to read: 8mins Category: Compensation
Why It's Time to Abandon the Merit Matrix
PeopleFluent Managing Director, Stephen Bruce, recently sat down with Trish McFarlane of the HR Happy Hour podcast. During their discussion about the merit matrix, Stephen shed light on why the merit matrix alone is no longer a viable option for enterprises developing and deploying efficient compensation planning and salary administration.
Developing a compensation strategy is a time-consuming project and the outcome of these strategies can impact every employee in your organization and have a material effect on the business. Considering the delicate and subjective nature of employee wages, it’s essential to have a fair yet competitive mindset when building your compensation and rewards programs. In addition to meeting the aforementioned criteria, your compensation plan should take into account the employee’s position and performance as well as your company’s budget.
Understanding that people are a company’s greatest expense with billions of dollars misspent trying to get it right, that’s enough of a business case for change. Managers must work in concert with their HR business partners to ensure the fundamental elements of a compensation plan are rooted in data and structure. Without these two essential components, leaders will find it difficult to justify such a plan to executives, compensation committees, and their Board of Directors.
In this blog post, we examine the design flaws of the merit matrix—a distribution model originally developed and often used with the intent to drive a pay-for-performance strategy, or merit pay. We also offer strategies to build a business case for change and ensure a more effective compensation model in your organizations.
A Brief History of the Merit Matrix
The merit matrix design was developed with the objective of providing pay raises based on how well an employee is performing and how competitive their salary range is compared with the current market rate. From a data-driven perspective, this isn’t a misguided starting point.
However, the fundamental premise allows for too much of the discretionary decision to be utilized in a tool that doesn’t allow for any type of review. In other words, there aren’t enough configurables within the tool to account for variables in real-life scenarios. Herein lies a structural design flaw where companies are overspending because they aren’t considering compensation as a strategic reward tool. With this understanding of a flawed tool that’s still in use, how can we address pain points with leadership to begin developing a structured approach?
Addressing Pain Points with Leadership
As mentioned, a merit matrix approach doesn’t account for the subjectivity of its intended purpose, which is to allow companies to make evidence-based decisions on how much money to pay someone. While the concept is great, people tend to have an emotional reaction when it comes to money. When managers are expected to sit with an individual and justify an increase versus another employee’s increase, they will focus on the percentage increase rather than other factors included in the decision.
While each organization has a different lens in which they look through, there should be specific data elements at the forefront of building a compensation and rewards plan. Loss impact should be a huge driver in any leader’s toolkit. Additional key data elements to consider are:
- revenue generation
- cost savings
- the complexity of the role compared to other positions
- an employee’s potential of promotability.
This leads to the issue of employee retention from a manager’s perspective. For example, certain roles in a company require complex skill sets. Consider the skills required for a software architect and then consider how difficult it is to hire and retain an experienced software architect. Only taking into account the performance rating and market pay is extremely limiting in this regard, especially when a great software architect could grow with the company and eventually become a Chief Technology Officer. A merit matrix doesn’t account for driving value to this role versus other positions.
Related content: ‘8 Factors for Comparing Compensation Management Tools.’
Develop a Structured Approach to Compensation Planning
Accounting for the fact that managers work closer with individuals than business leaders and HR partners, you have to allow for discretion. Leaders need to understand that a manager’s input is also a factor in determining an employee’s pay. Because there are multiple departments within an organization and several managers exist within these departments, the process must be more structured. Again, the merit matrix doesn’t offer this amount of configurability. And thus, it foregoes consistency, which is absolutely necessary in order to plan and deploy compensation at scale. This is where establishing specific data elements can help managers remain consistent.
Having a structured approach where managers and HR leaders can monitor, manage, and report on is paramount. This helps business leaders demonstrate a consistent method for distribution when meeting with compensation committees and executives. It’s all about ensuring the money gets to the right employees, which is ultimately the crux of building an effective compensation plan. Without the proper workforce data in place for leaders to audit manager recommendations, organizations can easily misallocate and overspend millions of dollars during the salary administration process.
“Whether it’s your CEO or the compensation committee, you’re entrusting this HR function to deploy $100 million,” said Managing Director of PeopleFluent, Stephen Bruce. “I’m showing and demonstrating a structured approach to ensure that this money gets to the right employees—and that’s ultimately what it’s all about.”
Building the Business Case for Compensation Planning Change
Although your HR business partner may be meeting with your managers and leaders on a correction basis, ensuring consistency in the distribution of pay isn’t possible without clear, specific data elements. Leaders want to drive pay decisions based on elements that impact performance. They want to provide market pay that is competitive. However, when given a merit pool of 3%, for example, many leaders may begin to feel constricted.
In reality, the approach must be a top-down strategy. Establishing a business case for change must begin with an audit of the current processes within your organization—across every department. Managers must be allowed to continue providing discretion while using the set data elements provided from a highly-configurable tool. Going back to the software architect example and considering the potential for promotability—a main data element—leaders should ask questions like:
- Are they assigned to critical projects?
- How have they historically performed when working with peers and others?
- How quickly is this individual developing?
- Should I establish a program to help develop the individual?
More from the blog: ‘Beyond Ratios and Raises: 3 Compensation Strategies for Better Outcomes.’
Leverage Manager Input and Data Elements
How leaders deliver pay increases and further invest in these people depends on specific data elements. Furthermore, leaders need to invest in their managers. Managers will continue to use the policies and systems only to the extent that they are educated in how to deploy them. For instance, if a manager has the mentality to deploy 100% of their pool, they will do so every time.
Regardless of the distribution model, there must be a mathematical element as it relates to an individual deserving the level of pay or compensation rewards they receive. Setting clear guidelines for your top-level management and truly educating them on the distribution model and the set of data elements can help guide the process and allow them to provide discretion at the same time.
By challenging the existing data, you can begin remodeling it to find inconsistencies. Finding discrepancies, such as employees in a ‘high’ range from a market-pay perspective who still get the same pay as individuals in the ‘low’ range, can help you begin the business case for change. When sitting down with senior management or the Board and establishing this case will require you to present fundamental issues with your distribution model. Start by laying out inconsistencies, demonstrating a lack of data elements, and making recommendations on which elements should be required before any percentage of the pool is distributed.
Final Thoughts on the Merit Matrix
When it comes to the compensation planning, don’t be afraid to approach leaders by saying “we need a process because the one we have isn’t meeting the necessary requirements, and we’re overspending each year.” At the end of the day, most HR practitioners would look back and say, “we need a change.”
To learn more about why leaders need to move away from using the merit matrix, listen to a recording of the ‘HR Happy Hour Podcast’ with guest speaker, PeopleFluent Managing Director, Stephen Bruce.