What is Merit pay[a HR blog]

Merit Pay
Shibasis biswal

Definition: Merit pay is a pay increase based on goals or achievements set by an employer, rather than a pay rate based on a union contract or a defined pay scale for a position. It is also known as pay for performance.
Merit pay was first introduced in 1908 in Newton, Massachusetts and substantially gained popularity in 1983 after the publication of A Nation at Risk, which recommended
teachers' salaries be “professionally competitive, market-sensitive, and performance-based” (Protsik, 1995; A Nation At Risk: Recommendations, 1983).

Rational of Merit Pay

1. Encouraging high performer levels by linking people to pay
2. Embedding an entrepreneurial high preferences culture across the organization
3. the notion of equity orfairness

Advantage of Merit Pay
• Allows the employer to differentiate pay given to high performers.
• Allows a differentiation between individual and company performance.
• Allows the employer to satisfactorily reward an employee for accomplishing a task that might not be repeated (such as implementation of new systems).
Problems with Merit Pay

 One size fits all approach to base salary increases and bonus awards communicate a very negative message “Individual performance doesn’t matter here”. Here the good performers will disengage thinking “Why push myself hard”, if I am going to get same pay opportunity as everyone else.
 Superior performance leads to more positive than negative results (e.g. more acceptance than rejection by coworkers).
 Fighting over crumbs? As describes by Edward Lawler, having 30 years of experience said “I wish the employees who long for merit-pay paradise could hear the complaints of employees at co-ops where a merit pay system exists. They might hear about vague or subjective criteria, alleged management favoritism, disparities between departments, late evaluations and therefore late raises, and demoralization from fighting over "a lousy 15 cents per hour." This last may be the most serious obstacle to realizing the purpose of merit pay.
 As described by Edward Lawler “Merit pay only works when people are already making enough to meet their basic needs. If employees are just barely making ends meet, they won't be motivated to higher performance by merit pay. They'll only be dissatisfied not to get the maximum possible raise.
 Separate performance and pay reviews: Author Carolee Colter says that “There is a solution to this dilemma-separating the performance review from the pay review. For example, on the six-month anniversary of hire, employees get a performance review with feedback on their strengths and areas for improvement. At the end of the review meeting, manager and employee both agree to a limited number of specific performance goals. For strong performers, the goals could be more developmental than remedial. Six months later, on the one-year anniversary of hire, employees receive a pay review. At this meeting the manager informs the employee of the amount of her or his raise, based on progress observed toward the goals. This approach prevents the tendency. Normally, it was observed that for annual goals to be set and then forgotten. Perhaps not incidentally, that in co-ops with separate pay and performance reviews where the author has done employee surveys, they don't hear grousing about how pay raises are awarded. For management and other professional jobs, merit pay seems well accepted and easier to implement. People in these positions are usually higher-paid, and their "line of sight" is likely to be annual, not just from one paycheck to the next. Also, the difference between good and poor performance in these jobs can significantly impact the whole co-op among the organization.
Conclusions:

1. If an organization can't afford significant pay differences between high and low performers, or if they believe that the staff is underpaid in relation to the cost of living in your labor market, it is better to postpone the implementation of merit pay for non-management employees. Instead, give everyone predictable seniority raises and reward the high performers with positive feedback, new responsibilities, and promotions.
2. Better to put managerial time and attention into better coaching and counseling of employees with performance problems, and more timely corrective action, including removal of poor performers who demoralize the rest of the workforce. It won't bother employees so much that everyone is earning the same raise if no one is visibly screwing up and making everyone's job harder.
3. If organization does want to implement merit pay, separate the performance and pay reviews by at least several months. At the time of the pay review, base organization pay raise decisions on progress observed toward the goals set in the performance review. Also, need to make sure that pay ranges are wide enough to allow for significant differences in amounts of raises.

There is no pay system on earth that will satisfy all the employees. But we can have a pay system that supports our organizational goal for a high-performing and motivated staff.
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