Merit Pay Systems

Allocation on the basis of past rather than future performance;

Based on the subjective ratings of employee performance rather than objective measures;

Based on individual rather than group performance; and,

Based on an assessment of long-term performance in that the increase in pay becomes permanent.

The trend in modern organizations is toward leaner, flatter organizations that are flexible, fast, and quick to respond to constantly changing customer needs. Downsizing, restructuring, re-engineering, outsourcing and other concepts aimed at achieving these goals typically mean fewer employees and a loss of motivation among remaining employees. Employees whose work performance does not meet organizational goals are no longer desired. As Vogeley and Schaeffer (1995) argue, “companies need to motivate their remaining employees to make a value-added contribution, take ownership, and be held accountable for their work”. Merit-pay evaluates performance against objectives and is heralded by many as a means of achieving such goals.

Scott, Markham and Vest (1996) argues that merit-pay compensation systems typically have the following goals: attracting qualified employees, retaining qu

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r the new merit-pay system being put into place, if the company reports losses employees will not earn any bonus. In an organizational environment where CEOs receive enormous bonuses even when companies fail to perform (Tyco, Enron, Adelphia, etc.), such an agreement increases motivation, and saves money when performance is not there on both the employee and organizational level. According to a Nissan spokesperson, “The arrangement will affect 2,000 employees in the rank of section chiefs and higher, and their annual salaries could vary by as much as 40%”. Nissan hopes to expand the merit-pay portions of unionized workers’ pay if the new pay system is effective. While merit-pay systems have been demonstrated to be effective for many organizations, there are definitely factors that make such compensation schemes effective or not. A strong link between pay raises and performance must be established. Many times the perception of employees regarding this link is a major factor in the success or failure of merit-pay compensation schemes to motivate employees and save money. As Montemayor (1995) argues, “Because of norm differences, the same merit system will be perceived by some as providing a strong pay-for-performance connect
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Approximate Word count = 1380
Approximate Pages = 6 (250 words per page)

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