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January 08, 2010
Do Merit Increases Promote High Performance?
Halogen Software, a provider of employee performance and talent management solutions, recently gathered a panel of 10 experts in human resources to debate an equal number of key issues in human capital management. As you may imagine, given their different backgrounds and philosophies, the experts disagreed with one another a great deal. We chose one question and summarized some of their responses to give you a flavor of the panel’s views—and the level of disagreement about the ever-inexact art of motivating and managing people. Here are their thoughts and insights as to whether merit increases motivate employees.

Josh Bersin, head of Bersin & Associates, which offers research and advisory services on corporate learning: “Yes. My experience in my own career and with many organizations is that merit pay and individual pay-for-performance programs are very important elements in a high-performing organization. [But] they must be accompanied by strong goal setting, transparency (showing the entire organization who the high-performing groups are), and a focus on how to succeed.”

Peter Cappelli, professor of management at The Wharton School and director of its Center for Human Resources: “Probably not. The reason is that at present, the differences in merit pay are pretty trivial. No one wants to give pay cuts, and with low inflation and increase pools of about 2%, even a great performer is likely to get around 4%. So they are unlikely to want to kill themselves for that. It was high-inflation environments where merit pay increases mattered.”

David Creelman, head of Creelman Research and writer and worldwide speaker on critical issues of human capital management: “I’m not convinced they do. There are lots of high-performing people in nonprofits who don’t get merit increases. It’s really a matter of culture. If you have a money-focused culture, then a lack of merit increases may signal to the person that there is no point trying. [In other cultures,] community, purpose, and pride are motivators.”

Kris Dunn, vice president of people at software firm Daxko, and HR blogger: “There are lots of ways to get [the desired] discretionary effort (career pathing, promotions, incentive pay, etc.), but common merit pay alone will not lead to the promotion of sustained high performance.”

Sharlyn Lauby, head of consulting firm Internal Talent Management Group and also an HR blogger: “No. Everyone has a price for which they will only tolerate so much. There are countless studies that show money is not the ultimate motivator. Even in tough economic times.”

Ed Lawler, author and professor of business at the Marshall School of Business: “The research on merit increases shows that they are a waste of time and money with respect to influencing performance.”

Laurie Ruettimann, SPHR and HR blogger: “No one wants to work for an employer who pays poorly and doesn’t share the success of the company with its workforce.”

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