FAQ: How Can Businesses Determine Merit and Compensation Without Ratings?

Employee Experience 2 min read

Today we’re introducing a new type of post here on our blog. Our customers are always looking to tap into the power of the crowd, to uncover best practices for using our technology or running their HR programs in general.

Our team frequently fields questions from our customers to help them solve specific issues or improve particular processes. Determining merit pay and compensation is a topic that they bring to us time and time again, as more and more companies do away with ratings. Here’s Patagonia’s story.

How Patagonia re-imagined its processes after doing away with ratings

Prior to using Kazoo, Patagonia determined and communicated merit pay, or bonuses, and compensation, or base pay, once a year in conjunction with annual reviews. The process was based on a combination of ratings on a five-point scale and manager discretion. Employees had little visibility into the process and a small window of opportunity to address compensation issues. As a result, only those who were considered a high flight risk or “squeaky wheel” could effectively increase their compensation, and overall morale was low.

Patagonia redesigned its process from the ground up with Kazoo. The first step was to separate merit and compensation. Next, and equally as important, the company re-examined and clearly defined what both merit and compensation are meant to measure. This allows Patagonia to more accurately assess and compensate employees for their contributions.

For Patagonia, bonuses are now distributed annually at the point of goal setting. They reflect an employee’s ability to meet their goals, which are closely tied to broader company objectives. Because goals are actively recorded, tracked and measured within the Kazoo platform, managers can easily see goal progress by employee, team, department, or even companywide.

Goal data from Kazoo provides an accurate starting point to determine bonus pay for individual employees. And, because the data can be viewed in aggregate, managers can easily compare and contrast employees in a single calibration session before finalizing bonuses.

Compensation, on the other hand, is adjusted twice a year, and measures an employee’s skills and value to the company. Patagonia managers use a tool to assess employees as professionals in their field, from inexperienced beginner to global expert.

Base pay is determined by that individual’s value on the open market. If employees accumulate new skills by taking on new projects, participate in training courses through Patagonia’s learning management tool or earn new degrees or certifications, their value to the company increases, as would their base pay.

Separating out bonus and base pay ensures the end results are accurate and transparent. For example, if an employee meets or exceeds their goals but remains static in their professional development, they will receive a high bonus but minimal pay increase. If an employee takes on new risky projects that allow them to grow as a professional but doesn’t meet their goals, their bonus is lower but compensation goes up according to their increase in value.

The Results

Patagonia employees appreciate the transparency afforded by the new process, both in terms of how bonus and pay is calculated but also the path to improvement. The process puts employees in control of their own career growth. If they continually meet their goals but want to increase compensation, they can seek out training opportunities, ask for feedback through Kazoo or collaborate with their managers to take on bigger, riskier projects. The process keeps employees moving in the right direction by forcing strategic conversations twice a year, ultimately improving the quality of Patagonia’s entire organization.