Linking Performance Reviews and Merit Increases


Employee performance outcomes is one important aspect to be reviewed when it comes to considering merit increases. It is not the only consideration though. Overall merit increase budgets, inflation, changes in external benchmarks for specific roles, current compensation ratios etc. are all additional elements which would impact actual merit increases per department and employee.

The resource I have here ties a specific overall individual performance review score to a specific range of possible merit increases. Some managers require a highly structured and fixed process for determining % changes and this is one way to create one. One should however also be sure to consider the other aspects mentioned above: budget for increases that year, company performance in the last year (overall), the market value of specific roles (roles that are in high demand). Compensation has a powerful influence on employee engagement and retention, but it is not the only one. Employees also care about career growth, flexible benefits and being helped to develop further.

I would caution anyone to consider unintended outcomes when attempting to standardize and establish rigid structures for considering individual performance and linking that in a fixed way to merit increase percentages. While intentions may be good: to reward your best performers for their contributions and to ensure those with lesser performance improve or leave the company, a process that is overly structured could fail to accomplish that intention.

The approach shared above – see download link – indicates one way in which a group has established a direct link tying the performance review process directly to the merit increase process. This example does not take into account some of the considerations highlighted above when it comes to selecting the actual increase percentage and I chose to share this resource anyway, because it does happen that HR is asked for a process like the attached on a regular basis and I want to make an example available to you if you find yourself in that situation.

I do suggest you consider ways to incorporate the other aspects as outlined above when you finalize your proposal to implement a more structured approach to tie performance management to compensation review.

My main advice is to think it through carefully to ensure your good intentions have the best chance of being reinforced by your performance management process and pay-for-performance approach . And I would also add that you should remain flexible in working with your documented process. Be ready and willing to adjust and update it as you gather input about how successful your process is in driving desired outcomes – results and behavior that you and the executives would like to see in your pool of employees.

Performance Management – setting up the annual process


final perf imp

The HR function manages a few processes which take place at various points over a 12-month period. Think of the annual salary reviews, annual training needs analysis, bonus calculations and performance management processes.

It is important to managers to have a clear understanding of each of these processes and when they take place throughout the year. If you set all of these processes on a regular annual schedule it helps managers to correctly anticipate next steps in processes and provide input required in a timely manner.

The process

This generic performance management process schedule I am sharing with you (see download option below) shows the various basic steps that would need to be followed over a 12 month period. There are references to the link with a salary/compensation review process and also the link with identifying and reviewing individual development needs and progress along achieving improvement goals.

Download a copy below

Implementing a process like this would need a change management plan if your organization has never done anything like this before. Even if you have had some form of a performance management process in place, but would now like to expand on it to include some of the elements shown in the attachment, a change management plan would be recommended. Before you start you would of course ensure that the manager/director, who is accountable for the performance management process at your organization, is aligned with your ideas and suggestions and strongly supports the direction you would like to take.

The benefits of having a documented process for Performance Management are:
  • It is easy for HR to ensure new employees, current employees, new supervisors and existing managers understand the process and their role in the process.
  • It is a way to help stakeholders understand and then prepare for the input and actions they need to complete in order to support the process.
  • Linked to a balanced score card, the process can make it clear to individuals/departments how they collectively and as individuals support the attainment of larger organizational performance goals.
  • Knowing that there are check-in moments for feedback and discussion moments around performance expectations, progress and development needs and activities can be a strong way to reinforce employee engagement. Many employees tend to consider other employment options when they feel that their development and career progression goals are not being met by their current employer.

This list is not exhaustive. For more information about benefits see links like Benefits of performance management or Importance of Performance Management