-- With Participation from Gerald Lou and Frank Wagner
Earlier this year, we had the honor of bringing together Frank Wagner and Gerald Lou to share their insights on best practices for one of the busiest times of year for compensation professionals: compensation cycles. We’ve compiled this guide, integrating the insights and questions from our webinar.
Merit cycles are essential for organizations to manage compensation effectively. They help ensure that employees are rewarded equitably based on their performance and contributions to the company. In this post, we’ll delve into the intricacies of merit cycles, and best practices to consider before implementing them.
A merit cycle is a structured process that organizations use to determine salary increases, bonuses, and equity grants based on employee performance. The goal is to align compensation with individual contributions and company objectives. Seems simple enough. Right? Wrong. There is no one right way to run a merit cycle, however there are some key stages that lead to a successful implementation.
The merit cycle can be broken down into three main stages: pre-planning, the planning stage, and post-cycle evaluation.
This stage is crucial for setting the groundwork for a successful merit cycle. Key activities include:
For companies that have yet to do this, Frank recommends pre-determining salary, bonus, and equity allocations -- in addition to any variability and performance distributions -- for teams to track throughout the cycle and reflect on afterwards as well. Longitudinally, the organization will also have more data on how to do derive more precise planning or trends across the organization.
During this stage, the merit cycle is actively executed. Important actions include:
Gerald described two common approaches with model creation: top down and bottoms up. The top down methodology assumes a percentage per person, say five percent, and allows discretion for planners to allocate accordingly. This is common in organizations that doesn't have performance calibration standardized. Bottoms up budgeting takes inputs such as performance distribution, high performance flags and more to model out the increase, often times leveraging a merit matrix as well. Depending on the maturity of the organization, you may want to be cautious of when you move from top down to bottoms up as it can involve significantly more stakeholders as well.
More mature organizations will rely on an unforced distribution for performance so minor variance is allowed and accounted for as a discretionary spend item.
After the merit cycle is completed, organizations should evaluate its effectiveness. Key activities include:
"If employees understand the reasoning behind their compensation, they’re more likely to feel valued and engaged." -- Frank Wagner
Tracking specific metrics can help organizations assess the effectiveness of their merit cycles:
Effective stakeholder engagement is vital for the success of the merit cycle. Key stakeholders include:
Organizations may face several challenges during the merit cycle, including:
As organizations evolve, merit cycles will also change. Frank, Gerald and Rani, see merit cycles evolving to include:
Merit cycles are a crucial component of an organization’s compensation strategy. By understanding the stages, metrics, and stakeholder engagement necessary for success, organizations can create a fair and equitable system that rewards employees for their contributions. In the future, embracing transparency and leveraging technology will be key to upleveling merit cycles and improving employee satisfaction. It’s exciting to see much of this already being embraced at many of the startups we work with.
