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Jun 23, 2014

There are a number of movements afoot in the world of work that promise to impact the way we pay people. Two in particular may well converge to provide the final straw that breaks the back of merit pay.

Let’s begin with Exhibit 1: The “Open Salaries” Movement.

Pay transparency is coming. While it is unlikely that we will reach a point where every organization opens up all compensation information for every employee, I believe that the momentum and spirit behind the pay transparency movement will lead many employers to eventually embrace it, drawing back the curtain to reveal the details of their pay programs and practices.

Pay transparency will drive changes

This may or may not produce all the “benefits” that the movement’s proponents claim. “Open” pay won’t automatically be more “fair” because fairness is a subjective, complicated and highly personal thing, ultimately a slave to our collective inability to objectively gauge our own contributions.

Transparency will, however, change the way compensation is designed and pay decisions are made. As with any change, there will be both intended and unintended consequences.

Will more openness cause managers to be more cautious and risk-averse in their pay decisions? I’ve had more than one public sector compensation specialist — a pay pro already working in the world of open salaries — suggest that transparent systems drive managers to pay everyone the same, avoiding differentiation that favors high performers/high potentials because those decisions can be hard to explain and defend.

Enter Exhibit 2: The “Blowing Up Performance Appraisal” Movement.

Pay increases without performance reviews

Adobe has been in the news lately, the most recent of some prominent organizations that have decided to ditch performance appraisals in favor of a more forward-looking process featuring feedback and coaching over look-back assessments. As few organizations believe their performance management process is working ideally, many eyes are on these pioneers to see what lessons emerge from their experiences.

Pay-for-performance in organizations that have elected to kill performance ratings is necessarily different. Per the recent interview with the company’s Head of Rewards over at the Compensation Cafe, Adobe still allocates merit pay budgets to its managers but does not provide a formal matrix or set of salary increase guidelines to them. Managers are accountable for, but can use their discretion in, spending those allocated merit funds well.

You see where I’m going with this, right?

How long will merit pay last in a world where we’re struggling to accurately appraise employee performance — to the point where we increasingly ready to chuck the whole effort — and where salaries/salary increases are out in the open? Not very long, I’ll wager.

What will we do instead?

Looking at the crystal ball

Strictly market-based wages with “hot skill” premiums as appropriate? More emphasis on variable pay plans designed to reward specific, pre-determined individual or group metrics? Will recognition and non-cash rewards step into the void to provide the necessary differentiation for key talent?

What does your crystal ball say?

This was originally published on Ann Bares’ Compensation Force blog.