Along with the perennial debate over the beleaguered, traditional performance review process, and what constitutes an effective performance management system, comes a challenge to the traditional annual raise.

Whether directly or indirectly linked to the performance appraisal, the annual merit increase has been a stalwart tradition of corporate life. It may surprise you to learn that for all the criticism of the practice, a recent Mercer LLC survey put the number of companies that still do a fixed-date merit increase at 90%. Just over 1% of U.S. employers use a discretionary timeline for merit increases.

Now comes General Electric Company (GE), which is in the process of not only reassessing its longstanding five-point employee rating scale but also questioning whether annual merit increases best motivate employees, or not. GE says it is doing it to pursue “an opportunity to improve the way we reward people for their contributions.”  GE’s executive development head, Janice Semper, says that a more flexible approach to compensation is the company’s goal and “re-thinking how we define rewards, acknowledging that employees and managers are already thinking beyond annual compensation in this space.”

One reality that employers are confronting is a new, younger workforce that values perks nearly as much as pay. The old paradigms of what it takes to retain an employee with particular compensation programs are changing; therefore the sacred cow of annual raises is now up for discussion. Retaining talent today requires reconsidering everything from parental leave and paid time off to when and how performance is rated.

Several other blue chip companies have changed benefits to better address employee needs. Netflix has a paternity leave program that provides up to a year off for child care; Adobe Systems now offers six months for this leave. And now comes not only GE but Goldman Sachs and Microsoft Corp reviewing its performance review systems in the past year.

But as for challenging the traditional merit increase, GE has jumped out ahead of the pack. Professor Ranjay Gulati Harvard Business School says, “Ending annual raises hasn’t played much part in the conversation” of employee retention. But now that a company as respected as GE has been for its successful management principles is reassessing the practice of annual pay increases, “other companies will do it too.”

The practice of a fixed raise-day goes back to the 1960s. Before that, states Steve Gross from Mercer, inflation was so low, employees would typically get a pay increase only when they changed jobs, rather than as an annual event. To change the current practice means having to overcome a 50-60 year history of entrenched business practice.

GE CEO Jeffrey Immelt sees changing this long-held practice as one more step in implementing a strategy of simplifying the company and streamlining decision making. Changing its performance review process from a once-a-year conversation to an on-going process with rolling feedback using a phone app was the first step in this area of employee development. It was that step that led management to now consider debating the timing of compensation changes.

ASE’s 2016 compensation surveys are rolling out as we speak. ASE is hosting its Compensation and Benefits Conference today and its 2016 Salary Survey is officially published. Participants can review the 2016 survey results at the ASE website in the Members Only section. 

Source: Bloomberg 6/6/2016