1. Money

Merit Pay Rewards Performance

By

Formally attired male arms and hands folded on top of a small pile of money

Merit Pay Is Based on Contribution

Copyright Stockbyte / Getty Images
Definition:

Human Resource Management Glossary Index:

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

Merit pay is an approach to compensation that rewards the higher performing employees with additional pay or incentive pay. Merit pay has advantages and disadvantages for the employees and the employer. But, all-in-all, merit pay is the best way to reward the employees that you most want to keep. Here's more about why you might want to consider merit pay.

Advantages of Merit Pay

These are reasons why you might want to consider merit pay.

  • Merit pay helps an employer differentiate between the performance of high and low performing employees and reward the performance of the higher performers.

  • Merit pay, unlike profit sharing or similar bonus pay schemes, allows an employer to differentiate between the performance of the company as a whole and the performance of an individual. While many merit pay programs also provide an overall reward that is distributed to all employees, to promote such values as team work, a portion of the available compensation is reserved for strong performers.

  • Merit pay also provides a vehicle for an employer to recognize individual performance on a one time basis. This is useful for rewarding employees who may have participated in a one-time project such as implementing a new HRIS or opening up a new sales territory.

Disadvantages and Challenges Inherent in Merit Pay

These are the challenges employers experience with merit pay.

  • There is no way, with 100% accuracy, to differentiate the performance of various employees to determine deservers of merit pay. 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.

  • The amount of time and energy that organizations invest in an attempt to make performance measurable for merit pay, including developing competencies, measurements, base lines for performance, and so forth, is better spent on delivering service for customers.

  • Given the limitations of 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 with the limitations that exist in the awarding of merit pay, merit pay is your best opportunity to ensure that your outstanding performers remain with your company and continue to make their astonishing contributions. Nothing demotivates a high performer faster than knowing that employees who have contributed much less in the organization, have received the same pay increase or bonus.

More About the Glossary

Submit a word for the Glossary | Complete Glossary

Also Known As: variable compensation, variable pay

©2014 About.com. All rights reserved.