Merit Pay—Just Say No

Great work should be rewarded. If you want someone to do something, you have make it worth their while. You get what you pay for.

Advocates for merit pay* believe that both basic fairness and organizational interests require that staff who perform better than their peers should be compensated accordingly. This isn’t crazy—the relationship between what you pay and what you get is central to our market economy. And it’s a central tenet of employer/employee relations in the private sector. 

But for most nonprofit organizations, it’s just a bad idea. Merit pay has major negative side effects, is difficult to implement and purports to address problems that you probably don’t have. Why bother?

Does Merit Pay Do What It’s Supposed To?

Not likely. Merit pay is intended to achieve the following objectives:

• Retain top performers.

• Inspire all staff members to perform better.

• Make compensation more fair.

Retaining Top Performers. Like everyone else, top performers undoubtedly take compensation into account when considering whether to stay in their jobs or go elsewhere. But that doesn’t mean compensation is the most important element of that decision. And even if money is the issue, few merit pay systems are robust enough to hope to impact that decision. 

High performers leave nonprofits for the same reasons that everyone else does: frustration with management, professional growth opportunities, lack of cultural fit, the opportunity to have a greater impact. When they do switch jobs primarily for a pay increase, that increase is generally massive—anywhere from 20 – 50%. This is well beyond the differential that a merit pay systems can reasonably provide. If there’s any data out there showing that merit pay does promote retention at nonprofits, I haven’t seen it.

Encouraging better performance. The argument here is that staff can be incentivized with money to try harder and—if they only tried harder—they would be more successful.  It’s hard to decide whether to treat this as silly or offensive. Either way, this rationale fundamentally misunderstands why the vast majority of nonprofit staff come to work. More perniciously, it blames staff motivation for underperformance rather than holding managers responsible for assuring that staff have the knowledge, skills, and support they need to succeed.  

Substantive fairness. What’s fair is a question of values. It’s possible that tying financial reward to individual achievement may be consistent with an organization’s values. But more likely, this particular definition of fairness will be in conflict with values that emphasize collective achievement and addressing unmet needs. Staff conceptions of fairness often focus on seniority, level of effort (as opposed to results) or group success. In addition to these considerations, an organization inclined to embrace the fairness of merit based compensation must still contend with the difficulty of applying this in a way that is procedurally fair.  Which brings us to. . .

Is Merit Pay Easy to Implement? 

Nope. For merit pay to succeed—or at least not devastate morale—the process through which it is awarded (and denied) must be seen as fair by those who are denied. This requires at a minimum:

• Clear metrics defining what constitutes merit and how merit will be tied to compensation.

• An effective and transparent performance evaluation system that legitimizes merit pay decisions. 

• Well-trained managers who apply consistent approaches to performance management and evaluation.

• Meaningful oversight across units to ensure individual employees are not disadvantaged by the idiosyncratic perspectives of their managers.

Increasing the degree of difficulty, discussion of the relative merits of individual staff members is wildly inappropriate, so the process must seem fair in the absence of managers’ ability to address specific results. Perceptions that decisions are being made subjectively undermine confidence in the process—and in management.  At the same time, confidence and trust in management is a prerequisite to the belief that the system is fair. The risks of this going badly should not be underestimated.

Will Merit Pay Have a Positive Impact on Organizational Cultural?

Unlikely. Merit pay assumes that offering financial rewards will impact job performance behaviors. But then can’t we also expect it to impact relationships and culture? Examples are likely to include increased competitiveness among staff, increased obsequiousness to managers (who control merit pay decisions), reduced willingness to collaborate, and increased silos. Emphasizing rewards for individual achievements also devalues nonprofits’ greatest advantage—a shared commitment to mission.

Isn’t There be a Better Way?

Absolutely. . .

Retain top performers. Nonprofits have a secret retention weapon—the work that top performers do every day is meaningful to them.  Rather than offering an alternative motivation, lean into this one. Reinforce connections to the organization’s work. Offer top performers professional challenges and the training they need to be successful. Praise them, remind them that they’re valued, and—when you can—promote them. They’re still going to leave to take a job that pays them twice as much, but they’ll be more likely to pass when someone offers them an extra few thousand.

Encourage better performance. This is what managers are for! Focus on ensuring that managers are effective in supporting their teams—developing strengths, addressing weaknesses and setting clear expectations. If managers are doing this well, merit pay won’t be necessary; if they aren’t, then merit pay isn’t really going to help.  

Fair compensation.  To the extent that your organization does value compensation based on performance, apply this to positions rather than individuals.  Different pay for different work is more likely to be perceived as fair. Strong performers should be given job descriptions appropriate to their more substantial contributions and be compensated accordingly. 

Finally:

• If you can afford it, consider pay bumps or year-end bonuses for everyone.

• Don’t give poor performers a pass. Letting them slide can be a huge demotivator for staff who are meeting expectations.

• Invest in staff collegiality. Connections between staff inspire and support better performance and improved retention. Nurture a great workplace where staff show up to cooperate, not to compete.

Merit pay makes it harder, not easier, to develop or maintain a high performing team.  Better to focus on strengthening management and reinforcing the centrality of your mission.  The for-profit sector has developed a number of valuable insights that can support better nonprofit management. Merit pay isn’t one of them.

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* Merit pay is either salary increases or bonuses that are attributable to individual performance.