A merit increase is a key component of many compensation programs, rewarding employees for their performance and contributions. But should employees on a Performance Improvement Plan (PIP) be eligible for a merit increase? This question is highly debated in HR and compensation circles.

Survey says:

Should Employees on PIPs Be Eligible for Merit Increases? HR Professionals Weigh In

In a recent poll that garnered responses from 1,267 HR professionals and compensation specialists, an overwhelming 76% voted that employees on Performance Improvement Plans (PIPs) should not be eligible for merit increases, while only 24% believed they should remain eligible. This divisive question touches on fundamental aspects of performance management, compensation philosophy, and organizational culture.

Understanding the Majority View: Why 76% Voted “No”

The dominant perspective among respondents reflects a view that merit increases should directly correlate with performance levels. As Bonnie Dilber, a Recruiting Leader at Zapier, explained, “I said no because by virtue of being on a PIP, I’d assume they weren’t delivering results, but I do think any market adjustments should be given.” This distinction between performance-based increases and market adjustments highlights a nuanced approach to compensation.

Isaac Tucker-Rasbury, Senior Data Analyst at BlueLabs, offered a particularly candid assessment: “The idea that a PIP is a real means to improve performance is…well that’s not shared by any of the non-HR professionals I know.” He further questioned the effectiveness of PIPs by asking readers to consider, “What percentage of PIP’d employees at your current or prior companies make it off the PIP and go on to even work at the company for another 6 months?” This perspective frames PIPs as primarily a formality before termination rather than a genuine development tool.

Linda McNally, an Executive and Broad-based Compensation Consultant, provided context on how PIPs typically function in performance rating systems: “My experience has been that companies use a PIP as the last step before firing for lack of performance. It is lower than a 2 on a 5-point scale.” From this standpoint, withholding merit increases aligns with the performance management framework.

The Minority View: Why 24% Voted “Yes”

Despite being in the minority, proponents of maintaining merit increase eligibility for employees on PIPs offered compelling arguments centered around development, equity, and the purpose of PIPs themselves.

James A Seechurn, an Independent Rewards Advisor, expressed surprise at being in the minority: “Wow, I was really in the minority here (I voted yes). If someone is on a PIP that means you (theoretically) want to keep them – you are working to improve their performance and chances are their morale is rock-bottom.” He emphasized that “improving performance is a two-way street” and that showing faith through continued eligibility might boost confidence and performance.

Paul Reiman, self-described as a “Compensation Trouble Maker” and “Progressive Thinker,” echoed this sentiment: “Philosophically to me a PIP is a plan to improve performance – it’s in the name, right? It shouldn’t be a path out, and if you intend to improve there’s no reason to exclude from the comp process.” Reiman also highlighted potential inequities in timing: “if someone successfully exited their PIP two weeks earlier, they’d be eligible. Someone on pace to exit in two weeks would not. Seems arbitrary.”

Salah Sahib, CCP, Director of Total Rewards, made an important distinction: “Yes. They are eligible for a merit increase, but eligibility doesn’t guarantee an adjustment.” This perspective separates the concepts of eligibility and entitlement, allowing for case-by-case evaluation.

The Middle Ground: Nuanced Approaches

Several respondents offered middle-ground solutions that acknowledged both viewpoints. Paul Lau-Szilard, a Total Rewards specialist, described an approach that balanced both perspectives: “Because merit is rooted in performance, someone on a PIP was viewed as ineligible at that point in time. However, we tracked the timing and budgeted for prorated increases slated to take effect upon successful completion of the PIP.” This approach received positive feedback from multiple commenters, including Justin Hampton, CCP, who stated, “I think this is the way.”

Lakshmi Rajasekhar, MHR, CCP, offered another balanced view: “They should be eligible, but if the merit matrix is built right, shouldn’t receive.” This suggests that well-designed performance evaluation systems should naturally account for performance issues without requiring special exclusions.

Sarah Severson, Sr. Compensation Manager, raised an important long-term consideration: “Where it gets tricky is if/when they do improve performance. How do we get them caught back up to peers?” She noted instances where employees with past performance issues can fall permanently behind in compensation, creating potential equity issues.

The Merit vs. Bonus Question

Brandon Zell, Director of Compensation, expanded the discussion by asking whether employees on PIPs should be eligible for bonuses. Danielle Collorone, Compensation Director at Creation Technologies, drew a clear distinction: “Merit, perhaps, bonus, No. Bonus is a look back on performance. If they are on a PIP for previous poor performance, I don’t see where there is a justification to pay them a bonus.” She characterized merit increases as “an act of good faith” for employees who successfully complete PIPs.

The Purpose and Perception of PIPs

A recurring theme in the comments was the fundamental question of what PIPs actually represent in organizational culture. While some viewed PIPs as genuine developmental tools, others saw them primarily as documentation for eventual termination.

Michele Russell, an Experienced Reward Professional, noted that “not all organizations put someone on a PIP meaning that they want to keep them… some organizations are risk averse and that PIP is a way of managing them out.” This variance in how PIPs function across different organizations may explain some of the divergent opinions.

Paul Reiman shared a specific example where a PIP addressed a limited aspect of performance rather than overall job quality: “We put a team member on a PIP around timely submission of documentation… They were great at their job in every other way.” This example challenges the assumption that employees on PIPs are necessarily low performers in all aspects of their roles.

Practical Considerations

Justin Hampton, CCP, raised concerns about potential mixed messaging: “Awarding some a merit increase while on a PIP sends mixed messages.” However, he also acknowledged that “an employee who understands they are still eligible for an increase may improve the likelihood of a successful PIP.”

Colleen Flanagan, Global Human Resources Executive, emphasized the complexity of real-world situations: “Eligibility does not guarantee increase. Situations are not always so black and white. There are country-specific concerns/considerations, and situations that may warrant a partial consideration.”

Conclusion

While the poll results show a clear majority against merit increase eligibility for employees on PIPs, the comments reveal a more nuanced conversation about performance management, compensation philosophy, and organizational values. Organizations may benefit from explicitly addressing this question in their compensation policies, considering not only immediate performance concerns but also long-term retention, development, and equity goals.

The debate ultimately centers on a fundamental question: Is a PIP primarily a developmental tool or a step toward termination? How organizations answer this question likely determines their stance on merit increase eligibility – and perhaps reveals deeper truths about their performance management philosophy.