How Do We Handle Merit Increases When Changing To A Focal-Point Appraisal Process?

Give managers general criteria and guidelines to make an informed pay decision. The key to a successful transition is communication.

 We are currently conducting performance appraisals on an anniversary-date basis, but would like to transition to focal-point appraisals of all employees at the same time. How can we fairly handle the accompanying merit-increase process to ensure no employee is "shortchanged" due to a coincidence of timing?

—Moving Targets, training & organizational development manager, nonprofit, Lancaster, Pennsylvania

Dear Moving Targets:

Many organizations have moved or are considering switching to a focal appraisal and salary review date. The "common review date" approach has a number of advantages: It strengthens the performance evaluation process as managers are comparing and ranking all employees at the same time. Also, it provides an opportunity to align pay internally based on performance, contributions and competencies, and it reinforces the pay-for-performance link. Organizations find that these benefits, as well as the ease of salary planning and administration (one time rather than every month), outweigh an often-heard objection: that it requires a greater time commitment to conduct all appraisals and salary reviews at the same time.

Timing of the focal appraisal and salary review date also is a consideration. Many organizations use a date a few months following their year's end. This allows performance to be assessed based on end-of-year results and then provides sufficient time for managers to complete all performance assessments. For organizations whose year ends December 31, salary increases are often scheduled for an April 1 time frame.

There are many methods that can be used to determine an appropriate pay increase for each employee, ranging from a flexible approach with general parameters for management to a more disciplined one with specific guidance. The method selected is a function of the organization's culture and goals.

One option is to give managers general criteria and guidelines to make an informed pay decision. These could include evaluating the employee's absolute performance, relative performance (versus peers), overall contribution, market competitiveness, importance of skill set, high-performance potential and retention risk. This is an opportunity for the organization to make decisions about the allocation of increases among different employees based on their performance and contributions.

As a specific example, a focal-point appraisal allows a manager to provide an up-and-coming performer who clearly surpasses others with a greater increase and better pay alignment, relative to the steady performer who doesn't contribute much beyond what is consistent with expectations. This approach is particularly relevant today, given the uncertainty of increases over the last few years in many organizations and the critical need for organizations to retain key employees.

Another approach is to establish a more formal framework whereby individual increases are ratably adjusted to reflect the shift in the timing of increases. During the conversion to the focal or common review date, some employees will receive an earlier-than-expected review and others will have their review date delayed. It is preferable to delay increases scheduled a few months before the common review date so employees won't receive two salary increases within a short period of time. The increase can be prorated and provided as a lump sum or folded into the merit increase.

Example: If an employee is scheduled for a 3 percent increase on a common review date of April 1, but would have ordinarily received it January 1, then he/she could get a prorated increase of three months (January, February and March) either as a lump sum or folded into the merit increase. In this case, it would be 0.75 percent of the base salary as a lump sum or 3.75 percent added to base salary.

If the same employee were to receive an increase three months early, then 0.75 percent would be deducted from the 3 percent and the employee would receive a 2.25 percent increase.

These prorated calculations can minimize perceptions of inequity or being "shortchanged," but no solution is perfect. For instance, the employee whose increase is delayed doesn't have access to the raise as early as expected. However, the eventual percentage increase received is larger than for the employee who receives an early increase.

Whatever approach is ultimately selected, it is important that managers have tools available to explain to employees how their performance was evaluated and their increase was determined. The real key to a successful transition is communication.

SOURCE: Linda Ulrich, Buck Consultants, Secaucus, New Jersey

LEARN MORE: Please read how to change employee perceptions about performance appraisals.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

Thanks to Crain Communications Inc. / Work Force