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Sins of Compensation: Top Merit Cycle Mistakes

, , , | Sep 7, 2022 7:33:46 AM | By

 

Despite the headlines about layoffs, inflation and recession, it’s still a candidate's market, with 11 million open jobs in June and 40% of employees planning to quit. Companies are still in competition for talent. Only now they have a tighter rein on spending.  At the center of this is compensation, a company’s biggest expense and one of the top reasons candidates decide whether to accept an offer. 

To help companies with these priorities, we’re sharing how to prevent the top compensation mistakes in five stages of the employee journey:

In this article, we’re exploring mistakes and solutions in the merit cycle stage.

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During merit cycles (aka annual reviews or focal reviews) employees are rewarded with raises, promotions or bonuses, so there are several compensation considerations in this stage. Here are the top 3 mistakes companies make during merit cycles and how to prevent them:

Mistake #1:Giving raises based on gut feel

Solution: Create standardized guidelines around how performance affects pay.

When it comes to performance ratings and salary increases, don’t rely on instincts or feelings, which make compensation an art rather than the data-informed science that it can be. Instead, create consistent guidelines and criteria, which help:

  • Managers make fair and equitable decisions
  • Employees understand the process

“Clear criteria help employees understand what’s expected of them to be considered successful in their roles, and what skills they need to get to the next level,” says Jose Guardado, seasoned recruiter, operator and founder of Build Talent.

Also, train managers on how to talk about pay, including how decisions are made and your company’s compensation philosophy, the formal statement that explains how your organization pays and rewards its employees.

 

 

Mistake #2: Over-greasing the squeaky wheel

Solution: Standardize your assessment of employee performance.

If an employee complains about their compensation, claiming friends make more for similar roles at other companies, you may be tempted to make adjustments to keep the employee. However, by doing that you risk overvaluing that employee's contribution over another who isn’t questioning their comp.

That’s why clear guidelines and criteria come into play here, too. Do your best to ensure the employee is at the right level and that you’re using the standard performance metrics. Base rewards on those metrics, not external factors.

“It’s HR’s job to identify outliers and make sure people aren’t being overlooked and undercompensated because they were leveled poorly or because their performance is overlooked,” says Ashley Brounstein, OpenComp’s senior director of people.

 

Mistake #3: Making decisions in a vacuum

Solution: Have calibration sessions with the greater leadership team.

To make the best hiring and compensation decisions for their employees and the organization, managers need insight into other teams and departments. Regular calibration sessions can help managers:

  • Get aligned on criteria for increases and promotions
  • Highlight top performers and critical talent
  • Learn how other teams are performing for a basis of comparison
  • Identify the most essential staffing needs to fit budget and performance goals

Once managers submit their salary recommendations, OPEN Imperative board member Traunza Adams suggests companies run a pay equity analysis to make sure women and other underrepresented groups aren’t getting paid less than their peers for similar roles

 

Want to get it right? Sign up for our beta.

Adjustments (Coming Soon)
Adjustments helps you easily make salary adjustments based on your company’s standardized guidelines and criteria, and share and collaborate with your leadership team.

You can also see where you’re allocating dollars for merit increases and promotions so you can stick to your budget.

Sign up for the waitlist.