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Merit Pay – Is It Worth It?

July 23, 2019  |   Compensation,Performance Management,Uncategorized   |     |   Comments Off on Merit Pay – Is It Worth It?

BCR_WindsorMerit pay systems have been around in some form since the early part of the 20th Century.

The objectives of a merit pay system are:
•  Attract, retain and motivate.
•  Develop a method to distribute pay equitably based on performance.
•  Use of merit increase guidelines tied in with objective performance measures.

Expectancy Theory

There is an Expectancy Theory about motivating with pay. The components of this theory are:

•  Instrumentality: the relative pay received is higher for high performers than low performers. Pay distribution is contingent on high-performance.

•  Valence: the differential between low performance pay and high performance pay is significant to the individual.

•  Expectancy: good performance is clearly defined and under the influence/control of the individual.

Assessing the Merit

The conditions that result in success for a Merit Pay System are as follows:

BCR_July Blog_Merit Pay

Some design flaws with Merit Pay Systems are:

•  Its’ zero sum feature.
•  Timing – annual performance evaluations and pay adjustments.
•  Annuity feature disconnect.
•  Small differentials between average and exemplary performance.
•  Breakdown in group cohesiveness and cooperation.

Increases have remained flat for more than a decade. Merit Spend has steadily reduced over time in favor of variable pay. Employees like variable pay because it: leads to higher pay, minimizes perceived negative consequences of performing well; and, creates positive outcomes. Variable pay is a more effective motivational tool than merit pay and creates a better platform to improve overall employee performance.

To truly differentiate pay to motivate and improve performance, we believe the following will happen:

•  Salary increases will start taking on new forms to create value to employees. (Valence)
•  More careful tracking and monitoring of high potentials. (Valence)
– Cost is 9 X pay to replace.
•  Better training and tools for managers to increase their understanding of pay differentiation. (Expectancy)
•  Paying closer attention to targeted audiences. (Instrumentality)

Contact Us

For assistance in reviewing the impact of the approach to merit pay on your Company, reach out to Benefits and Compensation Resources (BCR). Phone 847.236.1208 or info@b-cresources.com

Written by: Barbara Manny, BCR President & Consultant

BCR is a local, minority-owned firm with more than 25 years experience in serving non-profit, public, and privately held entities in the key areas of Benefits and Compensation Consulting, Performance Management, Human Resource Organization Development, and Human Resource Information Systems and Processes.

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