Baby Steps To Meritocracy

Meritocracy sounds great on paper. You reward your best people for doing a good job, and those who slack off reap fewer benefits.

What could be fairer than that?

As with any utopic vision, the devil is in the details.

There is some evidence that a “paradox of meritocracy” exists. A study conducted by researchers from MIT and Indiana University found that meritocratic organizations tend to reward men more than women.

So maybe it’s fairer for companies to opt out of meritocracy altogether and reward based on seniority?

Companies that do so will find themselves out of synch with the future.

According to George Mason University economist Tyler Cowen, the workplace is evolving into what he calls a “hyper-meritocracy” in which data increasingly determines employee value. In the book Average is Over: Powering America Past the Age of the Great Stagnation, Cowen writes that someday soon employers will be able to measure an employee’s economic value “with a sometimes oppressive precision.”

Imagine Company A, which has top-of-the-line data analytics. It’s able to determine which employees are good for the bottom line and which ones add little or no value. As its personnel become more efficient, the firm increases profits and market share. Company B, which has been watching its market share shrink, is forced to compete, so then it also evaluates its employees analytically, promoting and paying stars and flattening wages for other employees. This forces Company C and Company D to follow suit.

Cowen and other economists say hyper-meritocracy is coming. Will you work for Company A or Company D? Or Company Z? You can take steps now to get ahead of this trend.

The Problem with Seniority
“The paradox of meritocracy” is an issue that apparently needs resolving, but there are problems baked into any reward system.

Thomas Zwick is a professor University of Würzburg in Germany who studies human resource management and organization. He is the author of the working paper “Why Pay Seniority Wages?

The paper says that employers with high seniority wages in Germany pay employees a wage level below their marginal productivity during their first years with the company and gives them a wage higher than their labor productivity after they’ve been with the company awhile.

Can you spot the problem with this approach? Such a seniority-based system risks losing its most talented workers during their first years if they can leave for better pay, which means the company will be stuck with workers who do not have the marketable skills to leave and find higher-paying work. Another wrinkle: at some point the senior workers’ earnings outpace their productivity, meaning that less-productive workers are the firm’s most well-compensated.

“These talented young workers sign an ‘implicit contract’ with their employer that states that they regularly get higher wage increases than their productivity increase and that the firm has a strong interest in keeping them for a lifetime career,” Zwick said in an email interview. “Why should this be attractive for some talented people? First, some people in Germany are happy about a lifetime perspective. We should not forget that firms with steep seniority pay tend to be very attractive employers, such as large industrial firms with lots of high-skilled people and international success.

“Second, old-age pensions are based on salary during the last years of employment, and these earnings are clearly higher for employees in firms with seniority wages.”

Zwick says another advantage of incremental, regimented seniority pay, as compared to meritocracy, is that employers can offer long-term incentives without the disadvantage of having to decide who merits a bonus, which eliminates creating what he calls “losers.”

In other words, it all boils down to: “Trust us. We won’t lay you off when you’re 51.” From an employee perspective, it’s a good deal, but only when the company keeps its word. Who can foresee what the market will look like in 10, 20 or 30 years? The citizens of the Rust Belt in the United States know that large companies can’t always keep these promises.

Seeing Unicorns
How can an organization transition to meritocracy? Companies across the world are experimenting with meritocracy schemes right now. One of them is the Canadian-based ecommerce platform Shopify. At Shopify all bonuses are merit-based.

The 414-employee company assigns bonuses with a program called Unicorn. Under Unicorn, employees are nominated every month by their peers for going above and beyond. Using an internal tool, all employees can vote on a scale of 0-3, or they can abstain, and the employees who receive the most votes are awarded a percentage bonus pegged to Shopify’s current revenue. Employees can take home anywhere from $20 to $800 in a single month.

The company has built in a number of safeguards to keep the system honest.

Shopify Head of Human Relations Brittany Forsyth said the system has the added bonus of increasing information and communication throughout the company as employees learn what fellow coworkers and other teams are doing. Unicorn is so engrained in company culture that employees use the word as a verb. For example: “Nice work. I’m going to unicorn you for that.” Images of unicorns can be found throughout Shopify’s Ottawa headquarters. On the 0-3 scale, a 3 vote is denoted with a bucking unicorn.

Among the many criticisms of workplace meritocracy are “Who sets the standards?” and “Who gets to decide?” Shopify ingeniously avoided these dilemmas by crowdsourcing bonus decisions.

“When we created Unicorn, it went against the stereotypical bonus system of top-down,” Forsyth said. “We wanted something that was a new way of thinking about it. We wanted people to own their successes.”

Promotion at Shopify has meritocratic elements, too. The peer-review process is used as a tool when making the decision of whether to promote someone to Team Lead.

As for data, Shopify does not use analytics to evaluate employees, but the company’s human resources team is interested in evaluating which sources of hiring are most beneficial to the company (referrals versus targeted reach-outs, for example), and Forsyth would like to be able to track which performance metrics or backgrounds correlate with team members who rise to become high-impact team members.

Old Dogs and New Tricks
Shopify is a very young company, which gives it flexibility in establishing policies. But many organizations—schools, for example—have seniority in their DNA. So how do you change an organization’s reward structure without destroying morale? It’s a question University of Arkansas education policy professor Gary Ritter is studying. Ritter, the author of A Straightforward Guide to Teacher Merit Pay, believes that merit-based compensation can improve the learning experience for children in American schools.

His research, which looked at schools that implemented merit rewards, has taught him lessons that could apply to other workplaces.

Ritter says he would not alter the pay structure of current employees. He advises starting with merit bonuses. Management, he says, should then sit down with workers and co-define performance to set reasonable and appropriate goals. This part is important. While it’s relatively easy to evaluate a math teacher (did the students get better at solving math problems?) or a sales position (how much did you sell?), how does a manager evaluate an art teacher or, say, a marketing brand manager? Establishing clear performance parameters collaboratively answers these questions.

For an organization to reap the rewards, it needs to commit to meritocracy for the long-run, says Ritter. He believes that a merit-based system can’t be measured in one or two years, but rather needs to be in place long enough to attract a new wave of employees—the type who would welcome working in a meritocracy.

“If college grads saw this, and recognized that performance was being rewarded, it would change the composition of your workforce,” Ritter said.


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