Moving to Merit-Based Incentives

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The challenge: Moving from a tenure or level-based incentive structure is tricky. Emotions run high when it comes to compensation – as it should, given that we are talking about people’s livelihoods. Those who have succeeded in the previous system have come to depend on incentive program, and may feel as though they worked hard to reach their job level, only to have the game change. Those underserved by the current system feel as though incentives are unfairly distributed, but yet are still skeptical of change. Ultimately, employees want to know, “Will I get more money or have money taken away?” It’s a fair question.

The solution: Merit-based incentives afford the opportunity to reward behaviors, attitudes, and values critical to the success of the business. The following steps outline key considerations when moving to a merit-based incentive system.
 

  • Define “merit”. Through a “start, stop, continue” exercise, determine what behaviors matter most to organizational success. Consider mining existing data, such as job descriptions, performance appraisals, competency models, multi-rater, or engagement survey data to hone in on the employee attitudes and actions that impact success. After a laundry list has been established, prioritize actions and identify which actions serve as a counter-motivation for others. (For example, while reasonable work-life balance may retain employees, it may also negatively impact billable hours.) The incentive project team needs to debate the importance of each, and methods (including, but not limited to incentives) of motivating both, if appropriate. Consider including metrics more oriented to employee welfare, such as “development” and “well-being”. As an aside, while these steps discuss merit-based incentives, also consider balancing this effort with an incentive program focused on retention, such as stock options that vest over time. It is good practice to offer incentives on varying schedules to help employees stick with a particularly rough project or organizational transition.
  • Evaluate metrics. Organizations measure employees in a variety of ways. However, while the primary purpose of the metric is often served, it may not be statistically or empirically appropriate to use in establishing “merit”. Hire a measurement expert, such as an I/O psychologist who specializes in this area to evaluate your data. Have this expert create a “data dictionary”, cataloguing and defining each metric. (As an added bonus, if you complete this step you are well on your way to establishing a Talent Analytics function that can answer a variety of HR questions for the organization.) Metrics should be both objective (e.g., billable hours, attendance) and subjective (e.g., customer ratings, manager/direct report ratings). They may directly measure the behavior, or they may be “proxies”, or metrics that indicate the behavior is taking place (e.g., attendance in development programs to measure learning). You might also include other variables which indicate job difficulty or tough labor markets. 
  • Re-tool metrics. Throw out those that are not effectively measuring their target. Create and test new metrics for behaviors and attitudes currently not measured. Remember, employees will change their behavior simply because they are measured, so take care in deciding which employee actions and attitudes will be measured. 
  • Consider face validity. The goal of this data-based approach is to establish the same credibility and clarity a level- or tenure-based affords. Employees know when they’ve worked at an organization for five years or been promoted to manager; these boundaries for incentive eligibility are clear. Merit-based boundaries need to be similarly clear. Therefore, employees need to buy-in to these metrics and agree that the ultimate formula, discussed below, accurately represents high performance in their jobs. You might conduct employee focus groups to get their input early on – an effective tool in securing approval and acceptance of the new system. You may also need to explain to employees that some behaviors are new, supporting a new direction of, or cultural aspect to the organization. 
  • Establish a formula. With metrics in hand, work with the measurement expert to weigh behaviors and combine them in a merit formula. This formula will need to be communicated, so consider grouping metrics into “buckets” that employees will understand and recognize as relevant and important.
  • Bring the data together. Either in a warehouse or in a cloud-based data reporting tool, pull the data into one portal so it can be used for this purpose, and for a variety of other analytical tasks. 
  • Test and refine the formula. Run the formula and put it through the sniff test. Discuss results with managers. Are these people high-fliers? Why or why not? Did the formula miss an important aspect of their performance? Adjust the formula as needed.
  • Consider the role of the formula. What is the boss’ role in this process? Although more legally defensible, will management accept an empirical approach? What communication needs to happen to secure their buy-in, or how will the process account for their input? Is there a metric which can gather their opinion in an efficient way? 
  • Consider timing. How often do you want people to get feedback and incentives, and have the opportunity to adjust their behavior? Balance the ideal with administrative work of frequent data collection. (Consider the use of small pulse surveys or data collection to help you in your efforts.) 
  • Improve the path to development. When employees get low ratings, their natural instinct drive them to improve. A lack of development opportunities stymies employees’ motivation to improve their performance. Without development opportunities, this can be very frustrating and de-motivating. Map critical actions and behaviors to ways these same behaviors can be developed. Consider informal, just-in-time access to development content; formal training, either virtually or in-person; on-the-job coaching; and challenging job assignments. 
  • Implement in phases. Employees need to trust that they are measured accurately and fairly, and that they have opportunities to improve or “show their stuff”. Once trust is established, migrate, perhaps in steps, to the merit-based incentive program. 
  • Communicate! First about the performance efforts, then about the migration to merit-based incentives, communicate to employees throughout the process. Above all, demonstrate why this system is fair and affords them opportunities. Remember, external benchmarks are available to your employees on the internet. You might as well manage the message and be transparent.

Jeff Mike

Jeff Mike leads Bersin by Deloitte’s HR Operations and Service Delivery research He integrates rigorous research approaches with his extensive experience leading HR functions to engage diverse practitioners and to generate actionable knowledge Jeff also teaches HR to business people and business to HR people, formally at the graduate and undergraduate levels, and informally in organizations through his boundary spanning, consultative approach to problem solving and capacity building.

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