Compensation and Pay for Performance

Merit.pdf

Home >Human Resource Management homework help >Compensation and Pay for Performance

5/5/2020 Print Preview

https://ng.cengage.com/static/nb/ui/evo/index.html?eISBN=9781285872643&id=30222990&snapshotId=116383&dockAppUid=101&nbId=116383& 1/2

10.4d Merit Pay

A merit pay program (merit raise) links an increase in base pay to how successfully an employee performs his or her job. Unlike bonuses, once merit increases are given they become part of base pay, regardless of future performance. Merit increases are normally given when an employee achieves some objective performance standard (although a superior’s subjective evaluation of subordinate performance may play a large role in the increase given). Merit raises can serve to motivate if employees perceive the raise to be related to the performance required to earn it.

Theories of motivation, in addition to behavioral science research, provide justification for merit pay plans as well as other pay-for-performance programs. However, research shows that a merit increase in the range of 7 to 9 percent is necessary to serve as a pay motivator. Employees may welcome lower percentage amounts, but low salary increases may not lead to significantly greater effort on the part of employees to drive business results. Consequently, with low salary budgets (see Chapter 9), organizations wishing to reward top performers will be required to distribute a large portion of the compensation budget to these individuals. A meaningful merit increase will catch the attention of top performers while sending a signal to poor-performing employees. A strategic compensation policy must differentiate between outstanding and good or average performance. Furthermore, increases granted on the basis of merit should be distinguishable from cost-of-living or other general increases.

Problems with Merit Raises

Merit raises may not always achieve their intended purpose. Unlike a bonus, a merit raise may be perpetuated year after year even when performance declines. When this happens, employees come to expect the increase and see it as an entitlement unrelated to their performance. Furthermore, what are referred to as merit raises often turn out to be increases based on seniority or favoritism. A superior’s biased evaluation of subordinate performance may play a large role in the increase given. Even when merit raises are determined by performance, the employee’s gains may be offset by inflation and higher income taxes. Compensation specialists also recognize the following problems with merit pay plans:

1. Money available for merit increases may be inadequate to satisfactorily raise all employees’ base pay.

2. Managers may have no guidance in how to define and measure performance; there may be vagueness regarding merit award criteria.

javascript://

5/5/2020 Print Preview

https://ng.cengage.com/static/nb/ui/evo/index.html?eISBN=9781285872643&id=30222990&snapshotId=116383&dockAppUid=101&nbId=116383& 2/2

3. Employees may not believe that their compensation is tied to effort and performance; they may be unable to differentiate between merit pay and other types of pay increases.

4. Employees and their managers may hold different views of the factors that contribute to job success.

5. Merit pay plans may create feelings of pay inequity.

While there are no easy solutions to these problems, organizations using a true merit pay plan often base the percentage pay raise on merit guidelines (Guidelines for awarding merit raises that are tied to performance objectives) tied to performance appraisals. For example, a certain pay increase, such as “3 percent,” will be tied to a certain performance evaluation, such as “above average.” The percentages may change each year, depending on various internal or external concerns such as profit levels or national economic conditions as indicated by changes in the consumer price index. To prevent all employees from being rated outstanding or above average, managers may be required to distribute the performance rating according to some preestablished formula (such as only 10 percent can be rated outstanding). Additionally, when setting merit percentage guidelines, organizations should consider individual performance along with such factors as training, experience, and current earnings.

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

javascript://