Managing Limited Salary/Merit Budgets

Monday, March 01, 2010

Mechanically, a Merit Matrix is a simplistic way to manage an organization’s limited salary and merit budgets. It requires little creativity and very little in the way of negotiation with line managers and supervisors. Communications with employees is to the point, “your performance is here, your position in range is here, and this is your salary increase!” Of course, none of the above leaves any room for flexibility or for unforeseen events. HR could attempt mid-cycle changes to adjust for altered business conditions, However, unless the organization is willing to live with a very rigid formula, any positive deviation from the Merit model adopted results in being “over budget”. What other alternatives might be available to the organization?

One approach I observed while employed by our government was to have a budget for X% above and below revenue trends to allow for unforeseen changes in revenue streams. This allowed agencies to shift quickly from on target revenue levels to one below or one above the projected budget level. Once the on target Merit Budget is developed, it is very easy to increase or decrease the above and below target level Merit Budget to accommodate changes in the target Merit Budget percentages. The issue here is the assumption that Merit and Salary Budgets should be a reflection of the organization’s ability to pay via its increased or decreased level of revenue.

Another approach often put forth specifically by managers is that they should have the ability to allocate increases and mange to a budget for their individual department. Since they are observing performance on a daily basis, is it not reasonable to assume they are in a better position to determine which employees should or should not receive an increase, as well as the size of that increase. How can it be argued that they are less knowledgeable of the individual employee’s performance? After all, the manager is being held accountable for the performance of other aspects of their department, why would they not be allowed to manage Merit and Salary Budgets in the same manner they manage other departmental activities? It is not easy to argue that departmental manager should not have this level of control. In the end, it comes down to an organization decision on how HR and financial activities are managed by the business.

The approach I most question is one in which virtually all employees receive the same amount. Only the most significant deviation in performance would be given anything other than the same universal amount. Unless the employee walks on water or burns down the building, they receive the same increase as others. Even if the Merit and Salary Budgets are not officially communicated, it very quickly becomes known that everyone is getting X%. This not only demoralizes employees, but also constitutes an extremely ineffective and inefficient manner of managing the organization’s limited financial resources.

While no one solution fits all businesses, nor should any single solution be acceptable for sub-divisions of the same buniess, it does come back to the needs of the organization. The leadership of the organization must formulate that approach which is best suited for the business and/or its subdivisions at any given time and business condition.