Merit Pay

When most employees do a good job, they expect to be rewarded with at least a merit raise at the end of the year. This is different from a bonus in that it provides a continuing pay increase, while a bonus is a one-time payment.

Traditional merit raises are gradually being replaced by lump-sum increases that, like bonuses, are awarded in a single payment that does not become part of the employees’ continuing pay.

The term merit pay is more often used for white-collar employees, particularly professional, office, and clerical employees.

To the extent to which it is actually tied to performance, the prospect of a merit raise may focus the employee’s attention on the link between performance and rewards. A year is a long time to wait for a reward, however, so relying too heavily on merit raises as rewards could be dangerous, as the reinforcement benefits of merit pay are somewhat suspect.

The motivational basis for the merit plan can also be undermined by inadequate employee evaluations. You may have personally experienced the questionable nature of some performance appraisal systems, including the fact that some leaders take the easy way out and rate everyone’s performance about the same, regardless of actual effort.

Merit pay is the subject of much debate. Advocates argue that just awarding pay raises across the board (without regard to individual merit) may actually detract from performance, by showing employees they will be rewarded regardless of their performance.

It is not unusual for employees to view merit raises as an entitlement—everyone expects to get something. In fact, “at least 99 percent of employees get some increase in their pay every year” under merit-based programs.

Those increases, once given, never go away—they compound exponentially, rewarding employees for past contributions for as long as they remain at the organization. Detractors argue, for instance, that because many appraisals are unfair, so too is the merit pay you base them on. Merit pay effectiveness depends on differentiating among employees.