How to Promote Employees: A Merit-Based System

This article is an excerpt from the Shortform book guide to "High Output Management" by Andrew S. Grove. Shortform has the world's best summaries and analyses of books you should be reading.

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Do you want to know how to promote employees? What do managers need to know about promotions?

Learning how to promote employees is an important part of being a manager. You’ll need to know when people should be promoted, and how to actually go about the promotion.

Keep reading to find out how to promote employees.

How to Promote Employees Based on Performance

Promotions should be based on performance because when you promote someone, you create a role model and show what qualities (high performance) you value.

Note that when you promote someone who’s exceeding expectations, her performance will actually decrease in the new position to merely meeting expectations. This is because she’s still learning the role and navigating new responsibilities. As she gets more experience, training, and motivation, her performance will improve and she’ll start exceeding expectations again. Keep this in mind when learning how to promote employees.

You may fear promoting exceptional people because you don’t want their performance to decrease, even temporarily. However, if you don’t promote them, you’re wasting a resource. Eventually, they lose motivation, stop exceeding expectations and drop back to only meeting them, and settle for being average.

If you promote someone to a position that she’s not even able to meet expectations in, it’s not the failure of the employee, it’s the failure of management—you made a bad judgment call about her abilities. In this situation, you can fire her (which Grove thinks is “dead wrong”), or, you can “recycle” her—return her to the position she held (in which she exceeded expectations) before she was promoted. She’ll probably be embarrassed, but if you’re straightforward and supportive she’ll likely get over it quickly. You might promote her again later, once she’s gotten her confidence back and you’ve better assessed her readiness. Here’s more info on what happens once you decide how to promote employees.

Compensation and Performance

Compensation, like promotions, should be based on performance to reinforce the importance of good performance.

There are three ways to determine base salaries:

Experience, which ties compensation only to time. The longer an employee has spent in a position, the more she’s paid. This model is the easiest to implement and to justify to employees, but it implies that performance isn’t important.
- For example, good teachers and bad teachers who have the same amount of experience are paid exactly the same.
Merit, which ties compensation only to performance and output. This model can be awkward because:
- It’s hard to completely discount experience when determining someone’s salary.
- Money is limited (if you have lots of high performers, you can’t afford to pay them all well).
- It’s socially awkward to rank people by performance because someone always comes in last.
Combination, which is a compromise between the two systems above. Often, new people (with the same experience: none) start at the same base salary but get raises based on their performance.

No matter which system you use, salaries should max out because all jobs have an upper limit to their value. Once someone reaches the maximum, don’t keep giving raises on a schedule. This is another important part of how to promote employees.

Paying Managers

After you learn how to promote employees, you’ll need to decide how to compensate them, especially managers. When it comes to paying managers you supervise, whose output is more difficult to determine because it’s based on other people’s, you should create a performance bonus so that at least part of the managers’ compensation is based on team performance. This reinforces that a manager’s output is related to her team’s. The higher the total compensation, the higher the percentage of the bonus should be.

For example, senior managers, who usually already have a lot of money (and therefore think of it as a measure of achievement rather than a means to satisfy a need) should get a higher percentage bonus, such as 50%. Middle managers should get 10-25% because they’re still motivated by the practical need for money rather than the status-based need—if they get enough money to satisfy all their basic needs, they might not need more and could stop working.

To build an effective performance bonus system:

Determine which team’s performance is linked to the manager.
Determine what time period to consider when awarding the bonus. The manager needs to receive the bonus soon enough after doing the work that she can connect it to the work. Keep in mind that sometimes there’s a delay between activity and output, however, so the bonus may need to be somewhat delayed.
Determine if the bonus is based entirely on objective measures (for example, profit) or subjective measures (a performance review).
Determine how to keep the bonus system within budget.
- For example, don’t build a system that requires you to give large bonuses if the company is in a financial crisis.

For example, you might end up with a system where different factors contribute a percentage to the overall performance bonus. 5% could be determined by individual performance, 5% could be from the immediate team’s performance, and 5% from the company’s performance. This allows you to make each type of performance visible.

How to Promote Employees: A Merit-Based System