Do they actually give the raise? Because I’ve worked for companies where no one gets a raise for years.

It could be that they just use some standard COL raise. This would be a typical HR thing to do: Look at inflation, give everyone the same raise (assuming the budget permits), and be done with it.

You then have incentive plans that reward people with bonuses. If no one makes plan, you don’t pay out.

In a sick way, this is ideal for HR. The COL raises ease just enough pain to keep *most* people from walking. Would you rather pay the predictable 2% raise every year or have the unpredictable cost of having to hire and train more people?

Of course, this only works if people accept it. If they realize it’s a stupid way to do things, they’ll jump ship.

And, of course, it’s your best performers (who are not *most* people) who will realize this and jump ship. By the time HR flushes out the performers, they’re left with a bunch of average people and the planned raises do their thing.

It’s a sad, vicious cycle that makes HR think it’s accomplishing something.

Actually, I wouldn’t be too hasty in dismissing this approach. Let me explain: if you correlate compensation to performance you risk introducing two separate risks:

1. If you evaluate the performance using objective measures you might end up having undesired side effects: See what happened and still happens on Wall Street where rewarding short-term investment returns has increased system instability; or the anecdotes in IT about compensations linked to number of bug-fixes, incentivizing in fact higher number of defects in the code, so that they could be fixed later on.

2. A more subjective performance evaluations yields too much discretionality and hence power to an employee’s manager, while at the same time providing a fertile background for the growth of resentment and envy within a team.

As I said, do not be to hasty in dismissing this approach. It might not be the best approach but the alternatives could be worse.

Don’t lump the whole government together!!! My organization has been on a pay for contribution system for over 10 years. It isn’t pay for performance. Who cares how well you have performed? What matters is how well have you contributed to the mission of the organization.

In general, the poor performers have left and the top performers have been rewarded. There is a top-end cap which can sometimes be problematic though.

@rkc: I was waiting for someone to call me on my crack about government… Thanks for keeping me honest and for chiming in! I know some government operations that do good work. I worked in govt myself for a few years, as a local elected official, and I know the system is only as good as the people who run it.

@John Maxwell: Sorry, but I’ve heard that rationale before. If we don’t correlate compensation to performance, what do we correlate it to? The HR industry has produced some interesting straw men in the compensation debate. It’s as though the intent is to avoid basing compensation on anything but the original whim of the employer, and the intent seems to be to avoid any real discussion about effective compensation methods.

In your (1.) you raise extreme examples that I don’t believe tell us anything about the real issues. Your examples cite unusual problems, but I don’t see how they argue against performance based compensation.

In your (2.) all you’re saying is that someone is likely to get upset that someone else is getting favored treatment from the boss. I think this can be handled by establishing some clear, measureable criteria. I don’t think the problem is subjective vs. objective measures. I think the problem is lack of clear, well-defined, measureable objectives. When people know how comp works, they work to the comp.

One argument that I haven’t seen anyone bring up is about intrinsic reward. Do people work for money, or do they work because they want to do a good job?

@Nick: “One argument that I haven’t seen anyone bring up is about intrinsic reward. Do people work for money, or do they work because they want to do a good job?”

To quote Scott “Dilbert” Adams: “Work su**s, that’s why you have to pay people to do it”.

An exaggeration, sure, but a relevant point. Although having an interesting job is rewarding, and may count into the desicion on which job to take, one should be paid for doing a good job anyway.

Nick,

clearly, the examples I presented are extreme. Still, allow me to reverse the burden of proof: can you cite some objective performance measures that actually work, i.e., do not raise a principal-agent conflict? In my experience I never found one. Maybe you, or anybody else here, as had better experiences. In that case, I’d love to hear them.

Twice in my career an employer invented new job titles just for me – so I they could give me a raise and stay within their HR rules. Needless to say, they liked my work and wanted to keep me happy – and working for them.

I would have worked just as hard and just as well even without these raises. It’s called integrity. However, without the raises and the recognition they signified, I would certainly have been more open to the frequent job offers that I was getting and turning down.

My experience has been that companies which reward good performance are more likely to be pro-employee in other ways. Companies which stint on salary are cheapskates in other areas as well.

It has been a while since I have headed an HR organization, but I think the comments are a bit harsh. The HR rules are a reflection of Senior Management of the company. HR can be coordinators, administrators or business partners,but almost always reflect the intentions of top management. As it relates to pay for performance – I have found very few managers capable or willing to make the tough decisions of what is outstanding performance to be rewarded. On a 5-point scale with 1 being unacceptable, no manager would call out someone for a 1 or even 2 rating; often, they could not and would not call anyone on the team a 5; so you are left with adjusting everyone in the middle. When push came to shove, it was the managers who failed to develop criteria or standards to recognize and reward results. It is just a lot easier to blame someone else and HR is an easy target.

In my opinion, HR has way too much power and say so over what managers do and how they do it. I don’t know if it’s that managers have wimped out and fail to say, “I’m mad as hell and not going to take it anymore” or if it’s been this way for so long that they’ve just given up.
I do think managers can make decisions and will gladly make a change – if they are properly coached to do so. But if HR isn’t helping their managers, giving them the tools to manage performance, discussing the consequences of rewarding any type of poor performance, then it’s really a team effort to get to this point we are discussing.

@Phil,
When I was a manager, I had to come up with specific measures of performance for each project my employees worked on. But when they measured up or didn’t measure up, I could write that all down. And it would get into their performance review. So there was this constant watch on performance. All to the good, you may think, because there was a numerical basis for one person’s number 1/5 performance rating. But… When I did write it all down in the performance review, my boss told me I had to rewrite it and talk about all the mitigating factors (which by the way, I had addressed). So the result was the guy wasn’t going to get fired. And I wasn’t going to document the reasons for firing him. Oh, and because this measuring was on a project-by-project basis, we were constantly talking to this person about his performance. So. I went through a constant stress. But we can only grade on the curve. Granted, this company was completely chicken.

While I’m no HR fanboy, I have to agree with Phil Cooke about the role of upper management in compensation methods. When upper management of a public company takes a disproportionate amount of the “bonus” money, there is no much left for everyone else but a 2% raise. Because there is an inadequate amount of money to do a legitimate pay for performance program for those not in the inner circle, HR reverts to spreading the 2% around as best they can to minimize the negative feelings this process creates.The result of this is a tight spread of performance raises that causes widespread discontent anyway. This is the way my old company operated, and morale declined each year.
At my new company it works the opposite way. The upper execs are the last to get bonuses, and I’ve never seen a year when everyone didn’t get some of bonus tied to the finalncial results of the business. There is also a performance based raise that is esentilally a subjective, political process, but the big money comes from the objective profitability bonus.

I have been waiting for a raise decision for 6 months now. The owner of this multi-million dollar company has the final word but wants his partner (my direct boss) to pay me out of his office budget and not the parent company… my boss was nice enough to write me a personal check for quite a large sum in order to keep me happy and not get into a major brawl with the big man. We are just ants under their feet.

Compensation should be tied to performance. Raises and promotions need to go to top performers. All the rest should get the cost-of-living adjustment.

I have had a company congratulate me on my “promotion” which was nothing more than twice as much work for a cost-of-living adjustment. I quit and they were mad. But they were wrong to think I wasn’t intelligent enough to know that I was much more valuable than they treated me. My responsibilities were key to operations of one of the world’s largest companies, but my pay was that of a novice. I went elsewhere and got paid much more money.

I also try to work for myself as much as possible. In that scenario, there is nothing but “my performance = my profits.”

@John Z: I agree that management makes the decisions, and management often gives itself the available pool of bonus money. But in my experience, in too many companies HR keeps a lid on raises. HR is often judged based on how much “value” it gets for the salaries it pays new hires. If HR encourages higher pay, HR is judged negatively. It’s no accident that the “Compensation Expert” is part of the HR department. Why not part of Finance?

I also distinguish between bonuses and salary. Bonuses are a nice thing, but by nature they are “one shot deals.” Higher performance levels should be reflected in base salary.

My two bits.

I agree that HR tries to get a “good value” but sometimes that “good value employee” needs to move on to a place that will give the worker a better deal, heck, maybe even something fair.

Not all government workers are lazy and overpaid. I’ve worked for government (municipal and state) for 18 years of my professional career, and the rest in the private sector, and I can attest that I have seen lazy and overpaid workers in BOTH sectors. Government doesn’t have a monopoly on lazy workers. I worked with some of the most dedicated, professional, and hardworking people in both of my government jobs, and I’ve also had the pleasure of working with dedicated, professional, and hardworking people in my private sector jobs. The difference is that for some reason, government workers are fair game but no one complains about lazy private sector workers, even though their lack of follow up and productivity ultimately impacts customers’ wallets–through increased costs of doing business (passed on to the consumer).

Look what happened in 2008 to the financial services industry–highly paid CEOs drove the industry into the ditch, resulting in massive bailouts from the government (hoping to prevent a repeat of 1929). The CEOs got their huge bonuses, but destroyed much in the process. I have a hard time accepting that their huge bonuses were truly based upon their performance. If they had been lowly cashiers at Wal-Mart and had screwed up that badly, they would have been fired, not rewarded.

That said, I do agree with Nic–raises, unless you’re talking about COLAs, and bonuses should be performance-driven and there should be objective and clear criteria so management AND the employees understand the evaluation process and why who gets what. But I also know that management and HR are often not models of clarity or fairness, and that even in the private sector, lazy people are rewarded.

MaryBeth,
I completely agree with what you said about those outrageous bonuses for poorly performing private sector CEOs. The monies their companies were given were intended to be used for other purposes. Those bonuses should be taxed at 120% to penalize poorly performing CEOs who accepted that money. And yes, the Walmart cashier would have been fired for acting as they did!

@MaryBeth:

“there should be objective and clear criteria so management AND the employees understand the evaluation process and why who gets what”

BINGO! “Performance bonuses and raises” are too often couched as subjective judgments. That’s nuts. And it’s not fair. Without setting clear, measurable and objective criteria IN WRITING, it’s a game.

Nick, you’re absolutely right about performance bonuses and raises being determined by subjective criteria. Management doesn’t seem to care that using subjective criteria isn’t fair, and that is what is nuts. Using subjective criteria creates animosity and jealousy among employees, resulting in accusations of favoritism and eventually a drop in morale. If the hard workers see that the lazy workers get rewarded, then what is the motivation to continue to work hard when your efforts aren’t noticed or recognized?

I think you’re right–it IS a game, not to the employees being evaluated, but to management. What I can’t figure out is WHY they do this. At one job I had, the dept. head was required to do annual job/performance evaluations for all of us employees. This was in one of my private sector jobs. I had only been there a year and didn’t know the dept. head. I knew my boss (direct supervisor), and my colleagues and liked and respected them and they me. The dept. head gave everyone a “satisfactory” on the evaluations (no, as individual employees we were not part of the process–he filled out the forms and turned them into HR, with us employees receiving a copy after the fact, so there was no way to challenge the decision until after it had already gone to HR). We were furious–this dept. head didn’t know what we did. Our workday started at 8 am (a few started at 7 am) and ended at 4:30 pm. The dept. head came in after 10 am, slept in his office, took 2 hour lunches, and went home by 2 pm. He simply wasn’t around to see what we did, how the sub-depts within the dept. functioned, how we handled the workflow, how we handled problems, etc. And even when he was there, he was asleep or out to lunch. His office was not located where everyone else’s desks were, so I am not convinced that he simply chose “satisfactory” because he tossed a coin or threw a dart at the choices. The choice affected the kind of raise we received, and my sub-dept. as a group challenged our evaluations, citing that the dept. head was an absentee dept. head, one who never came around, never observed the sub-depts and individual employees, and therefore his assessments were incorrect. HR backed him, and our complaint went nowhere. It have an effect on morale, because we saw that the lazy workers received the same “satisfactory” that the go-getters received, despite the go-getters picking up the slack for the lazy workers. (Even though most were good, we had a few lazy workers.) None of us ever got a list of the criteria used to determine “excellent”, “satisfactory”, “fair”, or “poor”. This should not be a mystery. How else can employees improve (if they care to improve) if they don’t know how they’re being evaluated or what management needs to see in order to get a more favorable review?

@MaryBeth: So you all “got it” from the dept head, your own boss (who did not deal with the problem), and HR. What’s not a mystery is why good employees leave lousy companies. Nice case study. Thanks for posting it.