- Blog post
Merit matrix is an effective compensation management tool to reward performers
Compensation management in practice with a merit matrix
What does a merit matrix look like in practice? Here’s a typical compensation management example. So we’ve divided our performers into four different levels. You have our A, B, C and D performers
We then take in our salary range and divide it into quartiles. So the first quartile is people who are close to the minimum. Second quartile would be people approaching the midpoint. The third is people who are have just past the midpoint. And then the fourth quartile is people approaching the maximum.
For example, a company had a 3.5% increase for their compensation management budget. So we ran an analysis that said based on where your employees following the range based on your distribution of performance scores, this matrix will hit your 3.5% budget.
In the bottom right hand corner of the compensation management merit matrix, we have 0% increase. In the upper left hand corner, we have a 7% increase. So again, we stuck our hand in that sandbox.
Now, different organizations can interpret this different ways. In some organizations that haven’t historically done pay for performance, instead of having a high increase of 7% and a low increase of 0%, they may dip their toe in the water the first and they may say, “You know, we’re going to have a high increase of 5% and a low increase of 1% or 2%.
Other organizations may choose an ultra aggressive approach to rewards in compensation management. You’ll see this in a lot of high-tech companies. And I’ll say, you know what, our top performers, we had to put as many dollars in the hands of those people as humanly possible.
We don’t necessarily have anymore money to spend. We may still have that 4% budget. And so, instead of putting our hands on the sandbox, we’ve put an earthmover in the sandbox. And we’re just pushing as much sandbox into the left as possible.
The benefits of a merit matrix in compensation management.
I am a strong, strong proponent of this type of methodology because it doesn’t cost any money. We taking that same 4% and we’re using it to reward performance and also to move employees through the range.
Implementing a merit matrix will not necessarily reduce your turnover. But it will reduce your turnover among your top performers who are not paid very well and it will increase your turnover among your highly paid poor performers.
We’re targeting or managing our turnover. If we historically had 10% turnover, we’ll probably still going to have 10% turnover but we’re losing the people that we want to lose and we’re holding on to the people that we want to hold on to.
In addition, I can’t think of a more fair and efficient way for compensation management administration. We’re looking at somebody’s pay. We’re looking at their performance to determine their pay raise. We’re treating employees in a similar fashion, given the level of performance and the same level.
From the Rapid Learning Institute webinar: “How to Set Pay Ranges That Are Fair and Effective” by Ed Rataj