Chapter 6: Merit Pay Administration

Chapter 6 centers on how an organization can properly administer a merit pay plan. The effectiveness of a merit pay plan depends on the perceived fairness used to establish and communicate merit increases, as well as the amounts allocated to merit increases. One concrete method for establishing procedural justice is to provide an appeals procedure for those employees concerned with their merit increase. While often recommended by legal scholars, more widespread implementation of formal appeals mechanisms would likely benefit both employers and employees alike. For merit pay communications to be effective, they need to be made consistent with the principles of interactional justice and come from a credible source. For legal purposes, a more transparent pay plan is generally recommended over a secret or closed plan. A concern with an open plan, however, is that reward differentiation that is tied to performance may be less likely to occur. Another concern stems from employees who receive lower merit increases and/or have salaries less than a newly hired one may reduce their productivity. The available research does not favor the use of split roles over combined reviews. The allocator of merit pay has the central role in merit decisions. Steps must be taken by the organization to ensure that allocators have the knowledge, skills, and motivation to make solid merit pay decisions. Training and accountability should help to achieve this objective. Merit pay decisions must be made in accordance with laws and regulations, as well as company policy and ethical guidelines.