Is it time to end annual performance evals & merit increases?

Employees discussing is it time to end annual performance evals & merit increases?

Most organizations run merit increases annually. It typically happens either on an employee’s anniversary of hire or at the end of the year, and is based on performance reviews. This approach has long been considered acceptable, especially in light of the tools that were used (yes Excel, I’m looking at you).

But for a growing number of organizations, Excel is no longer used, and the process of running merit increases has been simplified dramatically. So the questions now are: What’s the right time frame for running merit increases? And are organizations missing out on some important benefits by sticking to annual reviews?

The truth is, the thought of once-a-year merit increases actually pains me. We’re no longer in the year 2000, and we shouldn’t be stuck planning comp there, either. I’ve laid out my case below for more frequent merit increases; see if you agree that it’s time for a change.

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The Case for Quarterly Performance Evals & Merit Increases

There’s no denying that, not so long ago, it was difficult for comp pros and HR teams to coordinate and run merit increases more than once a year. While most organizations may have intended to evaluate employees yearly on their anniversary of hire, in reality, performance management tended to happen on the same date for everyone, typically toward the end of the year. This shift occurred in order to assess employees at the same time; HR teams also liked the transition to a synced annual review because it harmonized how employees were viewed and allowed more freedom at the beginning of the year with budgeting.

What shifted?

While this was the best system available when merit pay was tediously calculated by spreadsheet, the introduction of modern compensation tools like SimplyMerit are changing the game. They allow HR teams, comp pros, and leadership to monitor data in real time and collaborate without the risk of introducing errors by manually inputting data. Not only is the data more accurate, but the burden of having to run manual spreadsheets for salary increases just once a year no longer exists. That makes it the perfect time to reexamine how we do things, and consider whether the once-a-year rule is, in fact, the most advantageous route.

The Benefits Of More Frequent Reviews

At this point, nothing is standing in the way of a more forward-thinking position on review time frames. We have the technology available, so there’s no reason to wait for a common review date—in fact, in many hot job markets, delaying reviews will only result in your best talent leaving.

My recommendation is to review salary and performance at least three times a year. At minimum, trimesters allow comp pros to ensure everyone is paid well, or at least that everyone is on a path toward a salary that’s aligned with the market. I would even go so far as to suggest quarterly merit increases—there is little downside to doing this.

Waiting an entire year to look at promotions or salary increases could put your organization at a huge disadvantage. Because you’re not communicating with employees frequently, you may not know of an employee’s dissatisfaction until it’s too late, and there’s no time to course-correct. For example, software engineers are in high demand right now. If they’re not rewarded for good performance in a timely manner, chances are high they’ll go somewhere else.

However, the company that has multiple common reviews throughout the year can have more frequent conversations with employees about their trajectory, and, if it’s in the best interest of both parties, can motivate them to stay. Even if a company can’t provide an immediate increase in pay (or doesn’t think one is warranted), multiple touchpoints allow managers to set benchmarks for improvement, mark realistic dates to reevaluate, and foster open performance- and pay-related conversations.

Here are the specific benefits of moving from an annual merit increase to more frequent conversations about pay.

1. Reviewing multiple times a year helps you keep a pulse on employee satisfaction and allows them to give early feedback to you.

  • Trimester reviews: If you’re changing your merit increase and performance review schedule for the first time (or if you’re a global company), I highly recommend starting with three times annually.
  • Quarterly reviews: For fast-growing companies, you need to frequently look at your workforce in totality. Are you getting ROI from all your people, and are your people getting their ROI? Quarterly interviews benefit both employee and employer—not only will you get a pulse on employee engagement, but you’ll also be able to see how/if your business is benefitting and if you’re moving forward in the right way.

2. Employees are motivated to perform at a higher level. When employees are confident they can have consistent, direct, honest conversations with their managers about pay and performance, they feel appreciated (or at least heard). If they trust the company and are still receiving value from the work they’re doing, they’ll work harder to achieve the goals set forth in each point of contact.

3. Managers are empowered to make wiser decisions with their budgets. More merit increase conversations over the course of the year give managers reason to monitor their budgets more frequently. (And with tools like SimplyMerit, they can get real-time visibility into compensation and budgets at the click of a button!)

4. Salaries can be normalized. Running three or four merit increases a year allows comp teams to piece out increases over time. With more frequent communication, managers can set the expectation with employees that pay gaps can’t necessarily be fixed all at once, but they can be addressed over time.

Start running merit increases more frequently and see the results.

In the current job market, employees can get data from everywhere and make their minds up about whether or not they’re getting paid fairly for their performance without having a single conversation with their manager. More frequent merit increase conversations keep that from happening, allowing managers the chance to honestly, proactively, have conversations about pay.

And with tools that gather the salary and compensation data you need to facilitate these conversations, it’s a simplified task that leads to meaningful, thoughtful rewarding of employees for their performance.


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About the Author: Laura Morgan

As a founder and owner of MorganHR, Inc., Laura Morgan has been helping organizations to identify and solve their business problems through the use of innovative HR programs and technology for more than 30 years. Known as a hands-on, people-first HR leader, Laura specializes in the design and implementation of compensation programs as well as programs that support excellence in the areas of performance management, equity, wellness, and more.