Is an individualized system of payment in which earnings are related to an assessment of employee performance in the job. Merit pay is also known as appraisal-related and individual performance-related pay and is usually based on a system of annual performance appraisal, which is used to allocate employees to one of a small number of performance bands. The level of performance rating then determines either the award of cash bonuses or salary progression through a scale or range. Merit pay is a long-established system of payment for white-collar and managerial workers in the private sector but has spread to other categories over the past two decades. It has been used more widely for manual and public-service employees, and its application to the latter has often been justified in terms of the promotion of a ‘performance culture’ within risk-averse bureaucratic organizations. There has also been a trend towards greater use of ‘merit only’ salary awards in which all of the annual increase received by employees is linked to the results of performance review. Under this more radical arrangement, cost of living increases are done away with and employees rated as poor performers will be denied any upward adjustment in salary. Merit pay remains a hotly disputed form of payment, with critics claiming that it can demotivate workers, erode teamworking, and generate perverse effects, as workers focus on performance targets at the expense of other dimensions of their work. Supporters, in contrast, claim that the principle of individual reward is intrinsically fair and accepted by many employees and that merit pay can contribute to the targeting of worker behaviour and raising performance. [See appraisal-related pay and competence-based pay.]
Subjects: Human Resource Management.