What is Merit pay?

By Abhishek Kathpal | Updated 08 August, 2022

Different tactics are employed by organizational leaders to boost performance. Despite everything, merit pay is gaining popularity as companies look for fresh, creative ways to reward staff members and boost output.

What is Merit pay

Merit pay meaning and definition

Merit pay is a type of compensation that rewards higher-performing workers with raises. It can be a strategy that employers use to ensure that their most valuable employees feel as though their efforts are being adequately valued. Since it provides employees with performance-based compensation based on whether they meet or surpass corporate goals, merit pay is most frequently employed in sales positions. By rewarding commitment, it is commonly utilized as an incentive to motivate employees at work. An useful tool for performance management, productivity, and employee retention is a merit increase. Businesses typically set aside funds for merit pay and establish eligibility requirements for employees to meet. Most of the time, businesses provide their workers an equal chance to work for these advantages. compensation. Employees may be persuaded and motivated to surpass organizational objectives or key performance indicators by merit compensation.

Difference between merit pay and other bonus pay.

Other incentives are only in place for a short period, whereas merit pay is a long-term salary increase. This is the main distinction between merit pay and other incentives. Second, unlike a bonus, which provides a more comprehensive picture of each employee (i.e., seniority, employment level, roles, and responsibilities), merit pay is often just concerned with performance and achievement indicators.g

How does the merit pay system work?

A company creates a set of performance expectations for its staff when it implements merit pay. The company also creates a strategy for assessing worker performance about those standards, with check-ins planned for every month or every three months leading up to the review date. The beginning and end dates of each fiscal year's merit pay increments are up to the discretion of the employer. For merit pay to be a successful compensation plan, an organization must be able to collect precise, comprehensive data to assess employee performance. How to implement a merit pay system successfully:

a) Create plans and strategies for merit pay.

b) Establish merit pay policies.

c) Adopt merit-based compensation policies.

d) Make use of incentive compensation management (ICM) software.

e) Look over your merit plan.

f) Reform merit pay procedures.

g) Inform all parties involved about changes.

Importance of merit pay

Increases in merit pay are significant because they show appreciation and respect for a job well done. Studies show that employees who feel appreciated at work perform better and are less likely to quit their jobs. Rewarding poor performance can lead to poor results, which can have an impact on staff morale. In this Harvard Business Review piece regarding employee engagement, the former Netflix chief talent officer said that great coworkers "trump everything else."

Pros of merit pay

a) Merit pay enables the employer to distinguish between and take into account individual team member performance.

b) For individuals who believe they are getting paid fairly, merit pay can boost morale.

c) Merit pay distinguishes between an individual's performance and that of the business.

d) Merit pay can be used to recognize employees for one-time efforts that they might not otherwise be recognized for.

e) Competitive, highly talented, and motivated workers are frequently attracted to and kept by merit pay because they value seeing a measurable return on their efforts.

f) The team can be informed about the company's goals and expectations clearly and concisely.

g) It can reaffirm the qualities that an employer values most in a worker and inform them about what they need to do to succeed at work.

h) Performance-related rewards include increased efficacy.

i) By paying them more, employers can distinguish between the strong performers.

Cons Of Merit Pay

a) Merit pay systems can be expensive to implement and maintain, especially if they involve intricate rating systems or in-depth performance monitoring of employees.

b) Without precise metrics, merit pay can be arbitrary, raising questions about favoritism.

c) It may cause unproductive rivalry among employees and them to prioritize their interests over those of the business.

d) Employees who do not receive merit pay may not fully comprehend why they do not or what they can do to earn it. Hence, frustration among employees may result from unclear communication of information.

e) Due to jealousy, fear, favoritism, undesirable competition, and job insecurity, merit pay plans may negatively affect morale and employee relationships.

Now, it's more common than ever for an employee to assume that their extra work would be rewarded. Employees in the Gen Z and Millennial generations claimed they would be more devoted to their companies if recognition prizes were increased (by 79 percent). If provided incentives for their work, 70% of Gen Z and Millennial employees would remain on the job for an additional year. If done properly and if successful, merit pay may even result in financial savings for businesses.

About the Author

Abhishek Kathpal

Abhi is the co-founder at Longlist.io. Funded by US based OnDeck, Longlist is currently enabling 50+ businesses to increase their candidate and client reach outs, automating the workflow across stages.