After receiving notice of his merit increase, Maddox said to Julian, his manager, “I really like working here, but I guess I don’t understand why my increase is so small.”
Julian responded, “You are an excellent producer but you are already one of the highest paid members of my staff.”
“I’ve heard we’re paying a couple of new employees at salaries that are pretty close to mine.”
“There may be some salary compression due to a tight market for skilled recruits.”
“Then it seems like the rational thing for me to do would be to quit.”
Most merit pay systems are zero sum, meaning that if you give higher percentage increases to some employees, you have to balance that by giving lower percentages to others.
Zero sum systems encourage managers to avoid high percentage increases. Managers do not like explaining to disappointed others why their increases are only average or perhaps below.
Most internal pay systems compound the issue by setting upper limits for particular skills and by paying more for new hires.
Laszlo Bock, author of WORK RULES, says “In a misguided attempt to be ‘fair,’ most companies design compensation systems that encourage their best performers and those with the most potential to quit.”