Annual merit pay loses its luster

For decades, employers have lulled their workforce into expecting measly but predictable pay increases every year. But that’s changing.

Annual raises are losing their popularity as a motivational tool. Some companies question whether doling out two or three percent pay hikes every 12 months makes an impact on employees’ drive to excel.

Managers often find that the amount of a pay increase is so minor that it barely registers with recipients. What’s worse, the slim difference between the pay raise for a superstar and a mediocre performer can largely defeat the motivational intent of giving people more money in the first place.

Pay experts argue that rather than try to tie small differences in performance to small differences in upping one’s salary, leaders should shift their focus to rewarding top performers with significantly more money—and not bother giving any raise to also-rans.

At Novitex Enterprise Solutions, for example, employees know not to expect any annual pay increase unless they perform well. About 42 percent of the company’s 8,000 employees received raises over the last two years. But the top echelon of staffers garnered raises of 10 percent or more. As a result of this approach, some middling employees who repeatedly do not earn raises get the message and leave. This leads to what a Novitex manager calls “healthy turnover.”

Other employers attempt to motivate people by monitoring their performance more frequently. Rather than wait 12 months to assess pay and performance, some organizations conduct monthly reviews and make adjustments accordingly.

— Adapted from “Companies Rethink Annual Pay Raises,” Rachel Emma Silverman,