We all know merit pay involves giving employees a permanent pay raise based on past performance. Often the company’s performance appraisal system is used to determine performance levels and the employees are awarded a raise, such as a 2% increase in pay. I worked in a hospital and with nurses in an emergency room that got this exact raise. They had a cap that they could hit where they maxed out once they had been there for over 33 years they stopped getting the raise. The ever looming and potential problem with merit pay is that employees come to expect pay increases. This means it will be more so of an expectation and less so something earned. If you know something is coming either way, would you work harder for it? Not to sound lazy but time is valuable and why put in more time than everyone else for the same rewards?
The only way to make merit pay more effective depends on making it truly dependent on performance and designing a relatively objective appraisal system. Without the appraisal system it is literally pointless. Ultimately, to be successful, the merit pay program must ensure that awards provided to the best performers will be substantially greater than increases awarded to average, or below-average performers. Merit pay when managed correctly provides a huge advantage for employers in my eyes. Merit pay helps an employer differentiate between performance of high and low performing employees and reward the performance of the higher performers. I believe that merit pay is worth it if you have the proper system in place. Others would argue that merit pay is a disadvantage because of the amount of time and energy that organizations invest in an attempt to make performance measurable for merit