Merit Pay

Merit pay is a program to reward top performers with increases in their annual wage that carry over from year to year. Merit pay is different from most other individual incentives. If an individual gets merit pay increases consistently over time, their annual pay can become significantly greater than that of others who do not consistently get merit increases.
Merit pay works as follows: The company announces a “merit pool” available for pay increases in a given period, usually annually. The merit raises will be given to the top performers in the company based on performance evaluations. Frequently, individuals who receive either outstanding or excellent marks will get merit increases above the average, while average performers will get a lower raise, and those who receive below-average marks will get no raise at all.
There are some significant potential problems in using merit pay as an incentive. The first issue is that merit pay is typically a very small percentage of the individual’s total pay, which makes it very difficult to use it as a motivator to perform. Remember that people need to feel that the reward is “significant” to them in order for it to motivate.
Merit pay is one of the most frequently used individual incentive programs in companies, and it can be used in some team-based situations as well. It requires that we pay attention to some details though. The first and probably most important item that HR needs to develop for a merit pay program is material that communicates the value of merit pay over time. We need to communicate that even what would normally be considered a small incentive can become a significant boost to an individual’s pay when they are judged to have merit over several years.
Secondly, we only want to reward true top performers with merit pay. If we do so, this means that those who are rewarded are truly recognized as having exceptional ability, and it also means that limited amounts of merit pay cash can provide a larger merit increase to those who deserve it. If we provide all employees with merit raises, the pool of funds must be spread out among everyone, and the small amount of the supposed “merit” increase doesn’t amount to much.

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