Merit-pay is an employee compensation scheme that is based on an employee’s performance. However, in contrast to other forms of incentive pay, merit-pay has four distinguishable features according to Lowery, Beadles, Petty, Amsler and Thompson (2002):
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 qualified employees, and motivating employee performance. Merit-pay compensation programs often work best when the organization constructs a strong link between performance and rewards. Merit-pay compensation schemes often work like the familiar “bell curve” in academic grading schemes. High performers land at the top of the pay range, average performers will be somewhere in the middle, and poor performers will be at the bottom.
While merit-pay compensation schemes are often us...