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Some of these earlier attempts at using merit pay as companywide motivational tools proved to be lackluster. Early adopters discovered that variable pay didn't have much variance to it. Analysis began showing that variable pay only begins to significantly affect behavior (i.e., motivate employees to work harder to protect their previous level of compensation and work smarter to qualify for their premium compensation) at certain levels of risk and pay involvement. Companies responded by putting greater portions of pay in play to push the tipping point. A standard stated that as much as 15 percent of total annual compensation must be risked to achieve the motivational kick that's desired. Clearly, this is not a game for the weak at heart!

Pay-For-Performance Basics

Just as fully charged batteries make a signal strong and clear, only a fully charged organization can achieve the excellence that merit-bonusing seeks. If workers are left out of a performance initiative for any reason your chances of success will plummet. Pay for performance is an "all for one and one for all" mission of the heart and mind. Make an equal place for everyone — fully charged — and don't ever exclude workers whom you think "have little effect on sales." There is no such person on your staff. The figure shows how Non-Traditional Criteria can be identified to motivate and judge your employees whose duties are not so visibly tied into easier to measure sales or financial objectives. This system can also be modified to custom fit your environment, and then used by your supervisors for your regularly scheduled evaluations.

Doesn't Everybody Love a Bonus?

Employees are conflicted about the shift from merit increases to bonuses. There is the opportunity to achieve higher overall compensation, but bonuses can be taxed more and the size of the bonus is often dependent on factors outside of an individual's sphere of influence. One commenter on the WSJ article said, "Sorry but bonuses for me don't measure up to a merit raise. I've been robbed of too many bonuses because of the underperformance of a company that had nothing to do with my personal performance. Because the sales department couldn't get their act together, any effort I put out had no impact." Given this, don't ever set the rules so that great workers lose bonuses because a companywide goal number was missed.

Common opposition to a merit-based bonus goes something like this: "Bonuses are nice, but they are not a given. Like stock options, they are a bet that the employee makes on the company. If done right (with clear criteria for qualifying for the bonus), this is a good thing — because you are effectively betting on yourself. However, most employees at least want a cost-of-living-adjustment to help hedge their bets."

Some Final Considerations

Please take into account these less-obvious downsides for management and employees before forming a new merit-based compensation plan:

• Qualifying for a loan/mortgage can be much more difficult.
• Payout timing is critical if the premium offered is a substantial percentage of pay.
• Some employees may distrust your motives, poisoning a generous merit-based bonus program by insisting to any employee who will listen that you are running a deceitful game to pick their pockets.
• Bonuses can sometimes work as a temporary fix for a problem (especially behavioral issues), but before you know it, the problem is back, and throwing money at it just won't work again.
• From an administrative and cash-flow standpoint, forecast how quickly you can turn great performances by your employees into payroll funds. If there are obstacles to a speedy turnaround, then the emotional connection between the reward and the successful event is diminished.

As with any core change to your business, watch your employee turnover rate very carefully. An uptick will send you a potentially dangerous message. Also, if you implement a merit-based bonus plan, make certain to hold a Q&A session to dispel the sometimes outrageous tax rumors people believe to be gospel truth (i.e., bonuses are taxed far higher than an equal increase in salary; bonuses are not taxable at all, etc.). Rushing to create a complicated merit-based bonus program can lead to unforeseen circumstances, but if you take your time and rely on the helpful and very specific resources available from experienced companies, you will develop more resonance, more buy-in from your leaders and a far greater chance to get the very best out of your compensation strategy.

About the author:
Chris Traynor, SPHR, is the director for Whip-Smart Management Consulting, Wayne, N.J., and has 25 years of experience in the solid surface industry as a consultant to fabricators, distributors and manufacturers. He can be reached at ctraynor@whip-smart.com.