Select and summarize an article on merit pay. What are the criteria for obtaining merit pay? Do you think that merit pay can be fairly administered? How is favouritism prevented? Do you think that merit pay should be included as part of an organization’s compensation package? Why or why not? Give reasons.
Article – Hansen, F. (2008). Merit-Pay Payoff? Workforce Management, 15475565, Vol. 87, Issue 18.
The article focuses on the emphasis and investments made by employers in merit pay as part of their organizational strategy to produce higher employee productivity and organizational performance. Most companies assume that merit pay and individual performance-based pay plans produce higher employee productivity and organizational performance but these companies not really test the actual impact of performance-based rewards on employee’s productivity and company’s financial results. There are few empirical studies from academic world that suggest that assumptions underlying merit pay are wrong. Individual pay for performance does not improve organizational performance except in very limited cases. This article also throws light on the need of separating correlation and causation of merit pay increases and organizational performance. Group bonuses, profit sharing and gain sharing plans are more effective forms of performance-based pay than merit pay or individual incentives. This article tries to emphasize that individual pay for performance may not have a direct correlation with the organizational performance and it is important for the companies to separate correlation and causation of merit pay increases and not look at the Merit Pay as a solution for all their problems.
Merit pay is a compensation system related to an individual’s wage or salary increase based on a measure of the person’s performance accomplishments during a specified time period. Merit pay plans fail to recognize the high degree of task interdependence among employees. Merit pay raises base salary based on employee’s performance. Merit Pay is used as a mechanism for motivating behaviours so as to improve employee’s performance and also to increase employee’s retention in organizations. In merit pay, employees receive an annual percentage increase in their pay, based on the outcome of a formal performance review (Lawler & Jenkins, 1992). In a merit pay system, employees who receive the most favourable performance reviews receive the greatest percentage increases. Organization believes that the employees will see the connection between performance and the size of their annual increase.
According to Lawler and Jenkins (1992), there is ample evidence that a well-designed and properly administered merit pay program can be highly effective in motivating employees. Merit pay systems, however, are often not effective because they are either poorly designed or administered improperly. A clear theme in the compensation literature is that pay systems should be designed to support the strategic objectives of an organization (Flannery et al., 1996; Lawler, 1990). Thus, if an organization’s strategy is driven by customer service, the merit pay system should encourage positive customer service behaviour. A common mistake that many organizations make is that they put very little thought on the analysis of what behaviours should be encouraged by the merit pay system.
For the proper administration of a merit pay system, an organization must be able to accurately measure performance differences among employees. At times, This becomes impossible to do with accuracy especially when jobs require a great deal of collaboration or interdependence. If performance cannot be accurately measured, a performance-based merit pay system doesn’t serve its purpose. Merit pay system also needs to be administered fairly. Employees must believe there is some validity to the performance-based pay decisions that result from the system (Scarpello & Jones, 1996). Fairness should be perceived by employees that merit increases reflect actual performance differences. Also, for merit pay system to work, the amount of fund allocated for merit pay increases has to be enough to allow the amount of the increases to be perceived as meaningful. According to Lawler (1990), a percentage increase needs to be large enough to be meaningful to employees.
According to me, the merit pay system is a good organizational strategy to produce higher employee productivity and organizational performance but it should be administered well and any kind of favouritism should be avoided at all cost. It should be well designed in all respects so that it can have a meaningful impact on employee performance. Company should also look at the timing of merit pay, so that the employees are able to draw connections between their increase and their performance.
Flannery, T. P., Hofrichter, D. A., & Platten, P. E. (1996). People, performance, and pay: Dynamic compensation for changing organizations. New York: Free Press.
Hansen, F. (2008). Merit-Pay Payoff? Workforce Management, 15475565, Vol. 87, Issue 18.
Lawler, E. E., & Jenkins, D. G. (1992). Strategic reward systems. In M. D. Dunnette & L. M. Hough (Eds.), Handbook of industrial and organizational psychology (2nd ed., Vol. 3, pp. 1009–1035). Palo Alto, CA: Consulting Psychologists Press.
Lawler, E. E. (1990). Strategic pay: Aligning organizational strategies and pay systems. San Francisco: Jossey-Bass.
Scarpello, V., & Jones, F. F. (1996). Why justice matters in compensation decision making. Journal of Organizational Behavior, 17, 285–299.