Merit pay as an Incentive and Merit Pay options

Merit pay or a merit raise is any salary increase the firm awards to an individual employee based on his or her individual performance. It is different from a bonus in that it usually becomes part of the employee’s base salary whereas a bonus is a one time payment. Although the term merit pay can apply to the incentive raises given to any employee – exempt or nonexempt office or factory management or non management – the term is more often used for white collar employees and particularly professional office and clerical employees.

Merit pay is the subject of much debate. Advocates argue that only performances based rewards (like merit pay) can motivate improved performances. They contend that awarding pay raises across the board (without regard to individual merit) may actually detract from performance, by showing employees they’ll be rewarded of how the perform.

Detractors present good reasons why merit pay can back fire. On problems is that almost every employees thinks he or she is an above average performer so getting a below average merit increase can be demoralizing. Another is the dubious nature of many firms’ appraisal processes. Since many appraisals are unfair, so too will be the merit pay you base them on. Similarly supervisors often give must employees about the same arise; either because of a reluctance to alienate some employees or because of a desire to give everyone a raise that will at least help them stays even with the cost of living.

Research results tend to be mixed. On study focused on the relationship between performance ratings and merit pay raises for 218 workers in a nuclear waste facility. The researchers found a very modest relationship between merit pay increase and performance rating. Researchers have recently focused their efforts on the effects of tying merit pay increases to teachers or faculty member research and /or teaching performance. Results here too tend to be mixed. They suggest that merit pay is more clearly linked with research productivity than with teaching effectiveness.

The solution is not to allow out merit raises, but to design them so they are effective. Among other things, this means establishing effective appraisals procedures and ensuring that managers in fact tie merit pay awards to performance.

Two more recent adaptations of merit pay plans are popular. One awards merit raises in a lump sum once a year and does not make the raises of the employee’s salary (making them, in effect short term, Bonuses for lower level workers). Traditional merit increases are cumulative but most lump sum merit raises are not. This produces two potential benefits. First, the rise in payroll expenses can be significantly slowed. (Traditionally someone with a salary of $30,000 per year might get a 5% merit increase. This moves the employee to a new base salary of $31,500. If the employees gets another 5% increase next year, then the new merit increase of 5% is tacked on not just to the $30,000 base salary but to the extra $1,500 the employees received last year ).Lump sum merit increases can also e more dramatic motivation than traditional merit pay raises . For example, a 5% lump sum merit payment to our $30,000 employee is $1,500 cash as opposed to a traditional weekly merit payout of $29 for 52 weeks.

The other adaptation ties merit awards to both individual and organizational performance. In this example, you might measure the company’s performance by, say rate on return, or sales divided by payroll costs. Company performance and the employee’s performance (using his or her performance appraisal) receive equal weight in computing the merit pay. Here an outstanding performer would receive 70% of his or her maximum lump sum award even if the organization’s performance were marginal. However, employees with marginal or unacceptable performance would get no lump sum awards even in years in which the firm’s performance was outstanding. The bonus plan at discovery communication is an example. Executive assistants can receive bonuses of up to 10% of their salaries. The boss’s evaluation of the assistant’s individual performance accounts for 80% of the potential bonus: 10% is based on how the division dos, and 10% on how the company as a whole does.