Maximise a limit merit budget

For many organisations in this region, the 2018 merit rounds will bring new challenges. As in other parts of the world, merit budgets are limited while employees are experiencing a rise in cost of living. Since 1 January 2018, VAT has been added to most areas of our life. Employees have already asked last year how companies will compensate them for these increases?

Most companies still wait and see what other companies are doing and are planning to provide a merit increase only. Any cost of living increases may follow at a later stage. With budgets already set for many organisation, companies can still be creative and maximise a limited merit budget by using one or a mixture of the following course of action:

  1. Peanut butter approach
  2. Differentiation by performance
  3. Targeted increases
  4. Lump sum awards

The peanut butter approach

The peanut butter style provides the same percentage increase to every employee. It is generally taken by organisations wanting to give an equal increase to cover the employees’ cost of living, especially since the implementation of VAT. While managers are not involved in the process and no additional calibration and approval meetings, the process is reduced substantially. HR and Payroll can implement the new salaries almost instantly, freeing up resources for other projects. However, such increases become a mere cost of living adjustment rather than a merit increase.

Differentiation by performance

Companies may want to support their performance-driven culture by linking it to financial rewards. These organisations provide different increases for the different performance ratings. In general, a low performing employee would receive no increase or only a minimal one. In contrast, the efforts, achievements and behaviours of high or top performers are recognised with merit increases equivalent to 2x or 3x of the budget.

An effective performance management system is a pre-requisite for any pay-for-performance programme. While some companies set a fixed increase for each performance rating, the trend is to enable managers to determine the increase from a range. In the latter case, a realistic timeframe needs to be set for managers to provide their recommendations and calibration before the increases can be communicated to employees and executed by Payroll.

Targeted increases

Similar to differentiated increases by performance, organisations can provide targeted increases for certain employee groups. This could be for critical roles which create value in, for example, improved quality, financial performance or customer satisfaction. They could also be of a strategic impact where roles are linked to the organisation’s capability to maintain and strengthen its position. Other employee groups could include high performances, high potentials, individuals on the succession plan, hard to replace or employees with hot skills or those low in the salary range.

Knowing which roles, skills or individuals should be focused on, HR and management can identify an appropriate merit increase. For simplicity, all increases to the identified groups can be of the same amount (peanut butter approach), yet, such increases may not lead to the desired motivation boost amongst the workforce. Should the company wish to differentiate between these groups, the proposed merit increase can be distinguished based on certain factors, like the contributions made to the organisation and the implications and risks of leaving. This process, however, can easily be over-engineered, leaving to a lengthy planning and implementation period which, at times of a limited merit budget, may be counterproductive.

Lump sum awards

As merit increases not only increase the current salary, they also add costs to other salary-linked elements like bonus, end of service benefits, pension or social security contributions. For companies to control the rising long-term cost implications, lump sum amounts can be paid.

Even here, companies have options around the payout: For all employees or just specific employee groups. A flat amount or varying amounts based on a points system (e.g. for performance or criticality of the role or individual).

Each approach has pros and cons as explained above and HR teams need to their overall objective when identifying the appropriate one (or a blended one) for their business. Linking it to the company’s culture is as important as getting top leadership buy in before communicating the chosen way to management and consequently employees.

When facing financial challenges, companies win by communicating a transparent overview to their employees. It helps to manage employees’ expectations and reiterates the company’s philosophy for success. Line managers need to be supported by HR and be prepared to communicate potentially harder messages to employees not receiving any pay increase.

HR teams together with line managers should also look at non-financial rewards to recognise, motivate and retain while being challenged by a limited merit budget.

Do you want to ensure your limited merit budget achieves the desired outcomes? Are you uncertain about which approach is the right one for your company? Call us on +971-52-2516322 and find out how we can help you maximise your merit budget motivating and engaging your employees.

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