The most common approach for determining Fixed Reward increases is the merit matrix which, according to Aon Hewitt’s 2014 HR Policy & Practice Report, is used by 60% of organisations. A merit matrix uses ratios to determine pay outcomes (balancing performance and market competitiveness).
Based on our market data we typically observe the following ratios for different performance ratios and positions to market:
There are many benefits to using a merit matrix which have aided its rise to popularity, but is this framework still valid in an environment characterised by low salary budgets? Does it give enough flexibility to managers? Does it differentiate enough?
Following the ratios used in a typical merit matrix approach (as above) carries some risk if ratios are not adjusted to reflect lower budgets. If we look at an outstanding performer who starts off at the bottom of the range (80% compa ratio) it takes an additional 2 years for them to progress to a compa ratio of 100% (market rate) under a lower budget. Failing to adjust ratios in a low budget environment may increase the risk of top employees leaving due to lack of progression.
Beyond adjusting the ratios, it may be prudent to consider:
- moving to a more flexible model
- where possible adding a pool of money for market adjustments
- topping up short term incentive payments for those truly high performers to bridge the gap
- investing in a tool that can assist with remuneration review to give managers a clearer view of budgets and how they should be allocated.
Relying so heavily on performance ratings where past performance does not always predict future performance can also have its dangers, but allowing managers enough discretion to accord for talent and potential can improve this risk.
Using a tool that allows managers to top up high performers at their discretion, will allow you to adjust ratios annually and model the impacts accordingly allows you to mitigate some risk. Get in touch for more information on how Aon Hewitt’s RemAlly™ software can assist your organisation in improving reward practices.