Pay plans are crucial to hiring and retaining the best employees. It remains a fact that the number one reason people are employed is to earn a living. Merit pay, incentive pay and profit sharing are three methods to provide employees pay based on their contribution to the companies bottom line. All three methods have their strengths and weaknesses. It is important to know which method to use for given situations to ensure a fair and equitable pay structure.
             In merit pay programs annual pay raises are linked to performance appraisal ratings. Most organizations use some type of merit pay system. Typically an annual raise is determined by the annual performance of the employee in combination of where is the pay range the employee is. The better the performance and the lower in the pay scale result higher merit increase. The main reason for this type of ratio is to maintain integrity in the pay structure; otherwise the compensation plan would have uncontrollable growth. Opponents of merit pay structures argue that the system is too subjective with very little actual reward for performance. These opponents would prefer a system that ties employee compensation to employee output or productivity.
             Individual incentive pay programs reward for individual performance. With these types of programs the pay is not part of the employees' base salary and they must be earned and re-earned. Employee performance is measured by actual employee output and not subjective ratings. These systems are administratively intensive and difficult to measure for employees for managers and professionals. These types of plans are very common in the sales and services industries especially in the high tech sector. When companies want to provide incentives for the organization as a whole they are more likely to use profit sharing or ownership plans.
             Profit sharing plans pay employees based on organizational performance. Like individual incent...