Updated: Jul 5
Nowadays, the greatest management challenge is to find methods of compensation, acknowledgement and reward that'll promote motivation - instead of destroying it. With that in mind, Jurgen Appelo created Merit Money, a feedback method based on the team’s perception of people's merit, rather than an envisioned performance. It's done among employees, refraining managers from the responsibility of correctly acknowledging everyone and everything. Results are very positive, considering that managers can only notice a part of an employee's contribution. “Only the system knows all the details” (Jurgen Appelo).
By enabling colleagues to spontaneously acknowledge one another, companies promote a culture of acknowledgement. That won't usually happen with the traditional yearly appraisal model. Merit Money makes professionals feel valued for their contribution, which positively impacts their motivation and work satisfaction. At the same time, it'll encourage behaviour that's valued by the team, facilitate communication and expand their perception on the work of colleagues.
At K21, the method has brought a better systemic view, since every employee began to notice everyone else's work. Things that would typically go unnoticed have also come to the surface, allowing for improvements in organizational culture. At Softplan, a software company, the method promoted collaboration and fostered the feedback culture. At Beeva, also a software company, Merit Money turned the previously nonexistent positive feedback into an important channel of communication.
Jurgen's model must always follow these five constraints, established by him:
“1- Salaries should always be expected, Bonuses shouldn’t be: Always keep bonuses a surprise. When bonuses become frequent and anticipated, they ought to be converted to regular salaries.
2- Earnings should be based on collaboration, not competition. When determining how much people should earn, the main criteria should be their collaborative work toward a common goal.
3 - Peer feedback is the main performance measurement: Contributions to a shared purpose are best detected and evaluated by peers, not by managers. Only the whole system knows all the details
4- Creative thinking can grow the compensation system (not rig it.) Expect that people can (and will) game any system, and tap into that creativity by inviting and supporting it, instead of driving it out.
5- Use compensation to nurture their intrinsic motivation. Make money a reflection of people’s curiosity, honor, acceptance, mastery, and all other intrinsic motivators.”
How It Works
The model works as follows: periodically, all employees have to distribute a certain amount of points among colleagues, regardless of belonging to the same team. The distribution criteria is up to each employee, or it can be based on the company's organizational values. It's up to each person to figure out how many points to distribute in each situation. Points expire if not distributed, so it's important to provide enough time for interactions to happen. Also, people should be able to remember the facts and shouldn't run out of points to distribute. These points are tied to a previously-set conversion scale and can be converted into gifts or money. That moment shouldn't be expected by people, it should be an element of surprise. For example, one could roll the dice every month aiming at a specific number. If that number never comes up within a pre-established period of time, the conversions must be carried out and the gift or money must be distributed. That'll ensure people's motivation won't be negatively affected.
Merit Money cannot be used for salaries or total compensation. Its playful, simplistic approach can lead to distortions, so it must be used only for small bonuses. For sharing larger bonuses, salaries and even equity fairly among a team, a more robust process such as Team-Set Salaries (TSS) must be used. Both Merit Money and TSS value interaction and collaboration, and strengthen the perception of fairness among the team. Both are used by companies to put new management models into practice, becoming more effective at promoting better results and employee satisfaction, although having different goals. Both are specific in what they offer: Merit Money promotes acknowledgment through feedback by peers; while Team-Set Salaries provides fair compensation by considering team members' input for decision making. When combined into organizational practice, the company will encourage teamwork and embed elements like the perception of fairness, systems thinking and transparency in its culture, as well as improving communication.