The Pros And Cons Of Merit Pay

By Published On: September 22, 2020
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Merit pay is a system of rewarding individual employees based upon their individual contributions or achievements to the team. Unlike a bonus that gives a more holistic view of each employee (ie seniority, employment level, roles and responsibilities), merit pay is typically focused solely upon performance and achievement metrics. 

Merit pay can persuade and motivate employees to exceed company goals or key performance indicators. The expectation that an employee will be compensated for their increased effort is now becoming more prevalent. 79% of Gen Z and Millennial employees said an increase in recognition rewards would make them more loyal to their employers.  70% of Gen Z and Millennial employees would stay at their job for another year if given rewards for performance.  Merit pay can even save money for companies, depending upon how it is implemented and if it is successful.  

However, there are many important factors to consider before adding Merit pay to your pay structure. This article will explore the pros and cons of merit pay and how best to implement a merit pay program.

The Pros Of Merit Pay

Merit pay allows the employer to differentiate and account for individual performance amongst the team.  The program can increase morale for those who feel they are paid what they are worth.  The pay scale may allow incentives for an increase in responsibilities that may be temporary, or based upon a cycle of events that happen throughout the year.  It may be based upon the implementation of new systems or seasonal sales efforts.  It can also accommodate the outdated seniority pay scale option which may reward only for longevity instead of contribution and skill.

Merit programs can often attract and retain competitive and highly skilled performers who appreciate seeing a measurable impact of their efforts.  An incentive program without adequate rewards to recognize your employees can often lead to high turnover and low morale.  Rewarding those employees increased efforts that stand out amongst the rest, will ensure that they continue to contribute and stay on board with your company.  Holding on to valuable employees is at the core of a successful company and it is getting increasingly hard to do so. 54.2% of employees would leave their job for a pay raise, career advancement (37.8%), and better corporate benefits (20.7%).

52% of employees are looking or would consider leaving their company because of compensation, 43% career advancement, and 19% lack of recognition.

Another benefit to merit pay is that it can help clearly set expectations and communicate the company objectives to the team.  It can confirm what is valued most in an employee and let them know what they need to do to perform well at their job.

The Cons Of Merit Pay

Without detailed and accurate data available to measure the performance of employees, there is room for subjectivity.  It can be difficult to find measurable and accurate data when assessing an employee’s performance.  However, this data vital to fairly assess and compensate your team.  

When there is not clear and objective data to assess performance, the evaluation is often left to the discretion of a manager.  This can lead to employees feeling that they are not rewarded fairly or discriminated against.  The system should have clear and measurable objectives.  This makes performance evaluations more accurate and fair.    It also makes it less likely for an employee to want to or be able to dispute a performance evaluation.  Even when there are performance metrics established, there may be room for subjectivity, which lend room for error, or outcomes to be challenged.  

Ultimately, it can lead to a considerable amount of time taken and resources spent to find an accurate and measurable program for merit pay.  Some businesses may not be conducive to supply and manage the amount of data necessary, to measure competencies and baselines for performance.  It is important to consider each unique business structure and whether it is possible to implement such a system.

Effectively Communicating The Plan

Merit pay must be communicated effectively to ensure the purpose of the system.  The company goals, mission, and objective must be communicated along with individual or team goals.  It is also vitally important that the reward structure is clearly understood, including potential payouts, KPIs (key performance indicators) of success, the timelines in which the goals must be made, as well as the methods of which the payouts are calculated.  

As the rules and parameters are rolled out and implemented, managers must make sure that they are effectively communicating all aspects of information and changes that are made.

This can be done through one on one meetings and performance reviews, the company website or database that employees can have access to, through new staff orientation, and all staff meetings.  A continual conversation about the program as well as allowing for an employee review of the performance assessments will lead to overall higher morale.  It is imperative that each individual is heard and has all the potential questions answered.

Tracking Merit Pay

Not only should each employee be able to review the system but the organization as a whole should evaluate the effectiveness of the program as time goes on.  

Reviewing the outcomes and comparing them against historical data is crucial to analyzing success. Companies should take full account of each aspect of performance that they are currently able to measure, so they are able to compare appropriately. Before deciding to roll out the plan, it is also important to where the increased expenditure in salary could also be invested. This will ensure that the program is worth the companies time and the investment allocated. 

Tracking each aspect of the program is critical to success.  The performance and merit of each employee, the pay structure, and the success of the program will all need to be measured.  This can be lead to considerable undertaking of data management.  An automated system is best to utilize when managing and comparing this level of information.  

Finding the right compensation management tool will allow for tracking each lever of success.  A fully integrated system that allows for real-time reporting, automated-workflows, and performance data, will be critical when it comes to administering merit pay. This system should also help to streamline the compensation planning process.  Visit to see how TalentComp can help you automate and manage your entire employee compensation process.

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