Compensation for Merit Pay
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, p. 100):1.Allocation on the basis of past rather than future performance; 2.Based on the subjective ratings of employee performance rather than objective measures; 3.Based on individual rather than group performance; and, 4.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 perf
A strong link between pay raises and performance must be established. The amount of funds budgeted for merit raises is one situational factor that is important. Other factors also have an impact on the success or failure of merit-pay compensation schemes. While merit-pay compensation schemes are often used to attract, retain and motivate the performance of employees, they are also being used by many organizations as a way of cutting costs over traditional compensations schemes. Dana Kauffman said the plan is geared toward cost-cutting without sacrificing competitiveness as much as it is employee motivation. Traditional compensation schemes often involve automatic raises based on cost-of-living increases, years on the job, promotions and title changes. Merit-pay compensation programs often work best when the organization constructs a strong link between performance and rewards. ormance 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" (p. Merit-pay compensation schemes often work like the familiar "bell curve" in academic grading schemes. Merit-pay evaluates performance against objectives and is heralded by many as a means of achieving such goals.
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