One of the best ways to create dissatisfaction, dissention, and distrust is to have a random pay increase system, but your company does one better: it actually rewards poorer performers and punishes better performers.
It is very difficult to find an acceptable explanation for this type of system. It is possible that the merit ratings are only part of the raise system, and other factors such as tenure or performance on key projects are entered into the equation. However, even if there is a decent explanation for your company's practices, the larger problem is that there is far too much secrecy, confusion, and ambiguity surrounding the raise process itself.
Unfortunately, the more likely explanation is that in this large bureaucratic organization, the pay increase policies have evolved into a confusing, cumbersome, clunky mess, with different managers applying different standards and subsequently inconsistent increases.
Cleaning up the pay increase policy is probably on someone's list of things to do. Perhaps a discussion with your manager or the Human Resources Director will help get this policy out of the "needs improvement" category.
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