Merit Pay

What Is Merit Pay?

Merit pay falls under the umbrella concept of “pay for performance.” It refers to pay raises based on an employee’s performance after being appraised, often by the line manager.

The scale of the increased pay is often based on the quality of the appraisal. The better your appraisal, the higher the pay increase is likely to be.

Traditional merit pay is a permanent increase to an employee’s base salary.

Lump-sum merit pay refers to one-off bonuses that are not permanent fixtures on the employee’s base salary.

What Are the Advantages and Disadvantages of Merit Pay?

As with everything in the business world, there are pros and cons to merit pay. Let’s look at some advantages and disadvantages.

Advantages of Merit Pay

Those who perform well get rewarded for doing so – Your best performers get the credit (and pay) that they deserve for what they bring to your organization.

It promotes healthy competition – this advantage benefits the employer more than the employee. But when there is a limited amount of work to go around, it makes sure that people perform to the best of their ability.

It helps identify the employees who aren’t performing as well as they should be – with merit pay, employees can’t hide if they are underperforming. It’s there in the data, and any issues can be addressed.

Disadvantages of Merit Pay

It can disrupt your team – by and large, those who perform well don’t tend to work so well with those who don’t. It can cause conflict, especially if employees are sharing details of their performance and their merit pay.

It can mask other issues – not every problem in business can be fixed with cash. Many of your employees care more about things other than money. They want recognition for their work; they want to know that they’re doing a good job week in week out. A bonus at the end of the year and a quick review don’t give them the context that they need to succeed.


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