Geeta Varma,

HR Freelancer,




Merit pay or synonym as pay-for-performance is defined as a raise in pay based on a set of criteria set by the employer. In this kind of work it generally involves the employer conducting a review meeting with the employee to discuss the employee’s work performance during a certain time period. It would not be incorrect to place a cautionary note that Merit Pay still remains a very heavily debatable topic amongst professionals.

Merit pay helps an employer to differentiate between the performances of high and low performing employees and reward the performance accordingly. Merit Pay actually encourages individuals to stretch their own limits to achieve the best. Merit pay, allows an employer to differentiate between the performance of the company as a whole and the performance of an individual. Every employer though desire that every employee should be able to give in their best, may actually be targeting to highlight strong and high performers indirectly for improving the level of performance for the Company.

Merit pay also provides a vehicle for an employer to recognize the high achieving individual’s in the departments and their levels of performance which could be set as benchmarks for overall performance of the company apart from increasing the levels of performance every year. Individuals when pitched against one another are also encouraged to improve their own levels of performance. This pay system promotes healthy competition among employees, encouraging each to work hard to achieve their very best while also delivering great results for the company. Employees enjoy being recognized among their co-workers and upper management for a job well done.

It is an acceptable norm that Merit Pay being a monetary gain greatly appeals to all the people; although it is not showcased in that fashion. We have also observed that employers use Merit Pay as an important tact to both bring the high performers together to uniformly increase the status of the performance for their business and also use it as an employer branding tool. It has been used by the employer to weed out low and non performers by sharing the data and hence plough it as an effective lean staff organization.

Merit Pay is widely used as a compensation strategy to motivate employees with pay increases for positive performance outcomes which allows them to achieve high levels of productivity. Although every business and company has its own unique structure and culture, and must decide what payment system works best for them based on a decided budget developed from salary reports and structures.

With a Merit Pay high motivation and high morale amongst the employees is also achieved. High performers are well aware of their skills and enjoy using them in challenges to achieve goals that are linked to monetary incentives. Merit pay gives these employees the recognition and reward they deserve and also helps companies to retain their best employees.

As there are positives for Merit Pay, similarly and parallel are the demerits of the same which should not be ignored. Merit Pay can cause conflict among employees. Some may feel that the system is unfair because no matter how hard they perform, they may not be able to earn any merit pay. This leads to very negative feelings of de-motivation and unimportance, apart from low self esteem and worth. This could be due to improper merit pay scheme, or structure leading to inconsistencies among raters.

Merit Pay can garner healthy competition, but they also may lead to the disintegration of team unity. If everyone is in it for themselves, problems could arise. Personal goals may become more important than team goals, which is not beneficial for the company as a whole. Top performers may also be seen as more valuable and important than others, leading to feelings of jealousy and invite useless political wars that can shake the company foundation and capability to soar high.

Unless the system devised is very scientific with no room for inaccuracies, there is no way, with 100% accuracy, to differentiate the performance of various employees to determine deservers of merit pay. At times the most desirable accomplishments and contributions are almost never measurable so the manager’s or supervisor’s opinion remains a constant in determining merit pay. This leads to unhealthy relationship between the employees and their supervisors. Merit Pay if designed on measurable performance indicators does not guarantee good service to the customers and may end up being money spent with little returns.

While most of the Organizations have not designed a full proof metrics, the ability of the supervisor to communicate to each employee the value of his or her contribution, and what superior performance worthy of merit pay entails, is an ongoing challenge. Some supervisors communicate better than others and communication about what entails superior performance is easier in some jobs than others.

Even while the low and the limitations exist for the Merit Pay, it still remains the best opportunity to ensure that the company’s outstanding performers remain with the company and continue to make their contributions and the organizations continue to scale up their set goals and targets.

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