Archer North System ANPAS
The Trouble with 
Merit Pay


The Archer North System advocates the use of an annual bonus incentive system rather than the more traditional merit pay rise.

As any experienced wage or salary administrator knows, merit pay rises lead in time to serious problems with "range compression". This occurs when an employee, as a result of discretionary rises in their pay rate, moves into the upper limits of the pay range for their job.

If the employee has performed well for several years (which is usually the case), they will become accustomed to the annual merit pay rise. So will their supervisors. But the effect of compression will mean no more rises. This is often a source of consternation to both the employee and supervisor alike.

Then begins the special pleading - and the threats - "... if we don't give Joe a rise, he will leave for sure and he's too darn good to lose." Many a hassled human resources manager will have heard this tale of woe before - and heard it many times. Often the difficulties lead to bogus re-gradings and "individual rate" treatment. Of course, every concession of this type is taken as a vital precedent by the next claimant.

The eventual result is an inefficient compensation system riddled with anomalies. The cost of this inefficiency can be high. In large organizations, it can quite easily amount to millions of dollars a year.

Of course, the theory predicts that an employee caught in this situation should be ready for promotion to a better paid job. While it is true that a well-timed promotion can overcome the compression problem, the inevitable tapering of the promotional pyramid means that only a few will escape the salary squeeze in this way.

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