Merit Cycle Pre-Mortem: Identifying Compensation Risks Before They Occur

Key questions and discussion points to help your team identify compensation inequities

Merit season is fast approaching.

Soon your managers will have the opportunity to award employees with compensation changes if their performance meets certain criteria. Merit cycles are the perfect chance for the company to celebrate human potential and performance.

And yet, merit cycles can be challenging workflows to get right as a company. They’re exhausting. People leaders often dread them. And because they’re so complicated and cumbersome, they can be subject to manager bias, which can create inequity problems that snowball quickly. 

But what if you could nip unfairness issues in the bud? What if your team could identify compensation risks before they occur?

Harvard published an article by a renowned management researcher several years ago called Performing a Project Premortem. They suggest that prospective hindsight, aka, imagining that an event has already occurred, increases the ability to correctly identify reasons for future outcomes by thirty percent. 

In short, they’re taking time before a project is initiated to imagine what might go wrong. Team members are encouraged to generate plausible reasons for the project’s failure.

This system can be applied to merit cycles. Your people team can take the time to write down the reasons for the potential problems with compensation, aggregate that list, and then use it to strengthen your compensation planning. 

If you want to conduct a merit cycle pre-mortem, here’s what we recommend:

  • Set aside two hours of uninterrupted time
  • Invite everyone on your compensation committee to attend
  • Meet in person if your workplace allows for it
  • Record the meeting and take careful notes

While you’re together, here are several key questions and discussion points to help your team identify compensation risks before they occur:

What if employees chatter about comp? 

Particularly if you’re a young company about to run its first merit cycle, there’s a probability that employees will talk about their levels of compensation with each other. They may not realize that different people who were hired at different times for the same role are being paid different amounts. That can cause a lot of internal drama, which is perfectly understandable. 

Companies with multigenerational, global and distributed workforces have their own set of challenges when it comes to compensation transparency. Klarna’s informative report on money management in the modern age shows that fifty percent of millennials are more likely to talk openly about their finances, whereas only forty percent of older generations will do the same. Additionally, depending on which country employees are based, their native culture has a direct influence on the degree of openness they feel about disclosing information like salary.

If this is a problem facing your company now, or an issue that could happen, but hasn’t yet, here’s our recommendation:

Consider that Colorado, New York and several other states recently released salary transparency laws, and more will follow. Your employees are going to see more and more where they fall in salary bands and team levels, and you have a chance to get ahead of that. Before your next merit cycle, brainstorm all of the questions that need to be answered.
Align within your team on that content and have it ready to be deployed in the event of employee chatter. Prepare your team with clear, accurate and current data to justify your comp decisions. Chatter is not a matter of when, but how much drama it creates.

What if people remain silent about compensation?

On the other end of the communication spectrum, it’s also possible that employees won’t say anything about their compensation. That’s typically not a good sign. Your company cannot afford to be afraid of talking about compensation in an honest, direct and open way. Think of it this way: Would you rather employees feel like a number in a cell on an anonymous spreadsheet, or start a transparent conversation about pay in real life?

With your merit cycle fast approaching, one risk you’ll want to avoid is that of silence.

If you run your merit cycle and discover that nobody has a single question about their equity, that often means employees don’t get it. No questions are worse than a lot of them. As we indicated in our most Everything You Want To Know About Merit Cycles (But Were Afraid to Ask), people at any given organization might hesitate to raise their hands to ask questions about topics they don’t understand. 

And long term, if they can’t make heads or tails of what their equity means to them, then that’s ripe for attrition. It lowers their incentive to stick around. 

Here’s how to get ahead of this risk:

Educate your employees equally on topics like equity. Close that knowledge gap with more than the occasional lunch and learn, but continuous, deep learning. To do so, get your frontline managers involved. They’re the closest to the people whose comp is actually increasing, so they know who needs a little extra love for this upcoming merit cycle.

They have the context of the team. If you can educate them on making fair comp decisions, they'll be in the best position to educate the broader team about complicated, nuanced issues they would otherwise hesitate to bring up.

What if there are consistency issues?

It’s rare to run a merit cycle and not have people knocking on the people's team's door saying: Why did this decision get made? Can you explain why my comp increase was five percent and not ten?

Currently, what’s top of mind for people leaders is inflation. And most employees are going to be frustrated and confused as to why their employers can’t increase their salaries commensurate with inflation. FastCompany’s article, however, summarized it best: 

“Inflation is rising, but your salary probably won’t.”

When your merit cycle completes and employees compare their comp increases to the inflation rate, confusion and frustration are likely to rise. When inflation is astronomical, people will naturally be more financially conscious.

One of our customers recently told us, quite transparently, their company’s gender pay gap was terrible. And they could potentially have been sued if that discrepancy got out. We were so appreciative of their honesty, because together we could prevent those risks from being repeated. Pave helped them build merit cycles with high structure and rigid (but not unbreakable) guidelines to achieve greater comp fairness.

Before your next merit cycle, try this:

Set clearer guardrails and tighten up your comp philosophy. If you’re concerned your next merit cycle might have the same problems, align your rhetoric with reality. It’s one thing to develop and even publish your compensation philosophy publicly.

But if people’s merit increases aren’t consistent with those principles, then that communication gap becomes a trigger for dissatisfaction and attrition.

What if there are inequity issues?

Pave talks to human resources and people teams every day, and many of them are sadly still approaching the merit cycle as the “annual manual.'' They're still going through every single employee with every single manager to make sure it’s done properly. 

And you wouldn’t believe the mistakes that are made:

  • One formula in the spreadsheet got broken, which messed up an entire team’s compensation.
  • Somebody forgot to finish a whole section of the merit cycle and didn’t give the customer success team any equity. 
  • Managers have ten people on a team, but only like two of them, so they end up dedicating their entire budget to a few top performers.

Compensation is a very personal issue, and it can be hard to separate our sense of worth from our paycheck. Money will always find a way to remain emotional, and as such, people leaders need to get ahead of that conflict. Otherwise small inequities will only get bigger over time. For example, if there’s unfairness in equity grants at the time of your next merit cycle, and company valuation rises, that’s unfixable. Unlike cash, you can’t take equity back.

To ensure this compensation risk doesn’t become a larger issue:

Identify your historical issues with pay equity. Perhaps underrepresented minorities at your company have vocalized their concern about being paid fairly in the past. Or maybe you’ve hired some managers who unfairly tipped budgets towards a small handful of people, rather to all the team members.

As merit season approaches, be intellectually honest about this history. Consider how your compensation team can increase its level of oversight on those potentially problematic areas. Ensure managers, who are the first line in communication with employees regarding merit increases, are trained well. Equip them to give their direct reports as much context as possible to understand why certain comp changes were being made during this period.

What if there are time and burnout issues?

When we talk to our customers, we hear a lot of deeply personal stories about people leaders staying up until three in the morning, pulling all-nighters, and people teams not being able to see their friends and families for weeks at a time during merit season. It’s devastating. 

One major time suck in particular is the mail merge. Because of normal human error, employee records are accidentally getting repeated, extra pages show up, codes aren’t working, certain entries are getting skipped, numbers are getting messed up, and so on. No wonder people teams are so worried and stressed out about the merit cycle time commitment!

Another labor intensive activity that leads to merit cycle burnout is the process of corralling all of the company managers. Probing them to get their performance reviews in on time can be like herding cats. What’s more, executives spend two full days back to back, just focusing on comp, and their time is extremely valuable. Meanwhile, the people's teams are under tremendous pressure and are concerned about looking like failures in the eyes of their leaders.

If this problem hasn’t happened yet, stay ahead of it as follows:

Accept that it’s unsustainable to sit down with everyone. Even if you did, things fall through the cracks. The solution can’t involve a spreadsheet. You need to have a defined set of rules in your comp philosophy, communicate it to managers, find a way to enforce it.

Some companies just give managers certain budgets to do whatever they want, but they should make it fair to prevent inequities before they happen. 

Now that you know which questions and issues to address ahead of time, your team can identify compensation risks before they occur. This pre-mortem will help your people leaders pick up early signs of trouble once the season gets under way, and not only survive, but thrive during your next merit cycle.