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If you’re not already using one, you may want to consider creating a merit-based performance matrix (MBM). The merit-based, pay-for-performance matrix serves as a guide for supervisors so that they suggest pay increases that are fair and support business objectives. The merit matrix connects performance to market rate pay.
Before you get started, keep in mind that adopting a competitive, performance-based pay philosophy requires some extra work. In order to differentiate wages based upon the results or behaviors of your employees, you need to know what you want people to do, be able to sort out how they are performing and, based on that, differentiate their pay.
The benefit of this extra effort is that you can drive your funds towards rewarding high-performing employees who are paid less than the market. You will first look at your best-performing employees, and then within that category, push more money towards those who are paid less than the market.
Here are some guidelines to remember when using or creating a merit matrix:
1. To start, you need to have your positions correctly graded within competitive market salary ranges. If you don’t have access to market data, then the performance measurement matrix will not work for you. However, if you have accurate market data, this tool will help you look at increases from both an internal and an external standpoint and ensure that you are rewarding high performance and paying competitively within the marketplace.
2. You will need to focus on actual pay, versus percentage points of increase. This means that you use the merit-based, pay-for-performance matrix, which has percentage points, as a salary increase template. At the same time, the ultimate focus needs to be, “What are the resulting pay points for each individual?” Percentages are critical, but it is very important that, as part of the exercise, your managers then take a look at the actual pay for each of the employees, and do a comparison based on their performance and contribution to the company. The performance measurement matrix will assist you there as a salary increase template, but, again, you want to make sure that the decision-making conversation is based on the actual resulting pay.
3. Analyze your historical rating distribution and see if there is any reason that your ratings may shift in the future. Essentially, you should look at your process and look at your distribution of ratings so that, if you have three ratings, you understand how employees have been rated historically. Most companies do not have an equal distribution of ratings so to ensure that the budget works out you’ll need to understand the potential for the distribution of ratings across your organization. You will also want to take into account that rolling out this system may cause the distribution to shift, so it’s important to be mindful of how this can impact the budget.
4. Analyze the incumbent pay distribution by their placement in the market. Again, this comparison can be done using a market-centered pay range that you have in an established salary structure, or by simply comparing where your employees sit relative to the market data for their position. Now you are ready to analyze where your employees’ pay falls. Normally you would classify by three or four pay-for-performance categories.
How to Create a Merit-Based Performance Matrix
The first thing to do when creating a merit matrix is to understand where your employees fall by performance. The second thing is to take a look at where your employees fall by compa-ratio (or market-ratio). Once you have these bits of information you know how your population is situated on the matrix you’ve created. Next is to calculate the potential increase per employee based upon current salary and position on the matrix. After this mathematical exercise, you must decide how to reconcile these numbers with your overall budget, ensuring you stay within your limits.
An important point is that you may end up with different matrices for different populations. For example, many organizations have a performance measurement matrix for their salaried/professional population, another for their hourly/entry-level population. You need to take a look at your own organization and figure out what makes the most sense. Keep in mind the need for accountability. Even though the pay-for-performance matrix provides a salary increase template, you must establish a merit budget and that will be your ultimate limit. Therefore, no matter what your matrix shows, managers will not be able to exceed the budget without extraordinary authorization.
The top left shows those high-performers at your organization who are currently greatly under-compensated in comparison to the marketplace. Your goal should be to bring their pay up to market standards as quickly as possible. Moving to the right, you can see that you still want to improve the wages of those who are making a little closer to the going market rate, but at a slower pace. Something to notice is that, on the bottom of the graph, those employees in the “needs improvement” category are suggested for no increase at all. It is important in this economic climate that these workers are aware of the severity of budget constrictions so that they will be motivated to make the needed changes. There is no reason to take money away from high-performers to give to this population.
Looking at those in the middle or “Meets Expectations” category, the distribution is typically in a bell-shaped curve, so this is where the majority of folks fit in. The thing to notice about this matrix is that, for a lot of employees in this middle range, there is going to be no increase recommended. That means that your managers are going to be put in a position where they are unable to offer a salary increase to employees who are performing perfectly satisfactorily, and that requires training to avoid potential problems. The manager will need to understand that it is simply because that person is already well-paid against the market, and that the possibility for further performance improvement exists and should be encouraged.
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