Compensation: Incentive Plans: Merit Pay

An incentive plan implemented on an institutional wide basis to give all employees an equal opportunity for consideration, regardless of funding source. The merit increase program is implemented when funds are designated for that purpose by the institution's administration, dependent upon the availability of funds and other constraints.

  • Allows the employer to differentiate pay given to high performers.
  • Allows a differentiation between individual and company performance.
  • Allows the employer to satisfactorily reward an employee for accomplishing a task that might not be repeated (such as implementation of new systems).
  • Employees should be paid what they are worth
  • Pay scales based on seniority or service perpetuate inequality (i.e., the equal treatment of employees whose job performance is not equal)
  • Without recognition of high performing employees, the company risks the loss of highly competent, well-motivated people and at the same time fails to encourage high performance standards.
  • Merit programs draw and hold superior performers, since these programs reward skill, effort, and provide opportunities for advancement.
  • The pay is subjective.
  • Merit pay often depends on subjective judgments.
  • Is a valid or reliable instrument being used for measuring job performance?
  • Merit pay plans may create problems in employee relationships, problems in morale related to jealousy, fear, favoritism, undesirable competition, and job insecurity.
  • Merit programs tend to develop divisive and competitive attitudes rather than cooperation among employees.
  • Merit rating places employees in a competitive position for salary increases. This competition between employees might go against organizational objectives of teamwork and cooperation.