As appeared from the original article authored by Kevin Haeberle, Senior Vice President and Senior Advisor with Integrated Healthcare Strategies
“Congratulations; your performance was “exceptional” this year – which is the highest performance level. Our department is better because of you. You meet or exceed every one of our performance expectations. As a result of being one of our model employees and rated “exceptional,” we are proud to provide you an additional half percent a year above the average increase. Based on your hourly wage, that is an additional ten cents per hour.”
How many times every year, across the nation, do managers have this conversation with one of their better employees? Tens of thousands. How many times do employees respond negatively? Tens of thousands.
The concept of variable merit pay is simple. Perform at a higher level than others and receive a higher financial award. The objective of variable pay is to provide both a reward and a motivator. A variable pay approach works well for competitive work teams and if the reward is substantial. Senior leaders constantly speak of its value and cannot imagine that all employees would not be motivated by such a program. Unfortunately, it simply does not work that way.
The underlying weakness in merit pay is that almost every employee believes they are higher performing than their peers. Extensive energy, effort, and angst is expended every year by managers and supervisors to prove employees wrong. Then, after disappointing a significant percentage of employees, the manager is ready to have a positive interaction and anoint an individual as a higher performer. What happens next? Go back to the first paragraph of this blog post. You are so exceptional, the organization is going to recognize you by offering “nickels and dimes.”
Human Resource Executives, managers, and supervisors know this truth of merit pay to be self-evident. Then why, year after year, are millions of dollars spent and thousands of hours of management time logged, to perpetuate a program that, in most cases, does not meet its goals?
The main reason appears to be that no one wants to go back to the “time-in grade” pay increase model which provided the same increases to better, as well as lower, performers. In today’s performance-based healthcare reimbursement and measurement model, it seems simply unacceptable to equally reward higher performers with average or lower performers.
The other hurdle limiting change is the dominant culture in healthcare which emphasizes equality and treating everyone the same - whether a patient or an employee. Providing VIP patient care rooms and additional pay for higher performers are both methods which help an organization, but that garner constant criticism. So merit pay is deeply entrenched in your organization, but doesn’t work. You do not want to go back to the middle ages of healthcare compensation where everyone is paid the same, and you do not have a wage increase budget to provide a substantial variance between performance levels. What can you do?
Merit pay does not have to be killed, just transformed. To address the belief held by most employees that they are high performers, you can alter their expectations by clarifying the definition of a high performer. A simple, but effective approach is to announce that the organization is committed to recognizing the top 10% or 20% of performance in the organization. This creates a clear expectation and is comparatively easy to budget.
What about those employees who are high performing but do not make the threshold? Most people are more willing to accept a pre-defined cut-off than an unknown threshold perceived to be created after the reviews are completed. Having a clear cut-off also creates an opportunity for discussion to help an employee achieve the next level.
Allowing an employee task force to establish the criteria for high performance, that is universally applicable to all positions, is another way to co-opt employee support and add more validity to the program. Once the criteria has been developed, incorporating peer review into the assessment process will also create a higher level of acceptance from employees who do not meet the threshold.
What do you do about a limited wage increase budget? Providing a sizeable cash award and a ceremony develops a higher sense of recognition and motivation than an hourly increase. By creating a 10% or 20% threshold of those who will receive recognition, the individual amounts can be higher and more predictable for both the employee and the organization.
Spreading a relatively small amount of money over a larger base of employees tends to dilute the impact of the increase dramatically, but most healthcare organizations follow this path because of that overwhelming culture to provide “equality” even in a program designed to “distinguish.” Focusing the dollars on a smaller number of people, with a program which helps manage expectations and allows for employee input, can help revive the expiring “merit” program concept in healthcare.
Typical variable merit programs are not dead, but they do need to be substantially transformed. It is time for change if your managers are starting to hear from your higher performing employees, “no thank you” when offered a minimally higher additional wage increase. Those employees are telling you that you need a more effective and simple model for rewarding high performance. As an added bonus, your managers will also appreciate the change.