Chapter 3: Diagnosing Situational Characteristics

In the previous chapter, general information was presented to help organizations assess the desirability of merit pay. This chapter will address the feasibility of using merit pay in specific organizational settings. The objective of the chapter is to describe some of the situations where it may be more advantageous to use a merit pay plan.

To accomplish this objective, settings where merit pay plans are likely to be found are identified, using the limited empirical research available, as well as the logical arguments advanced by various authors. The reasons why merit pay plans are used in some situations and not in others are discussed to diagnose when merit pay is appropriate. However, a word of caution is in order at this point. Many of the arguments are speculative. Much of what has been written has to do with what should be done. There is very little research on what is actually done. There is almost no research on how effective merit pay plans are under various organizational conditions. Hence, the arguments presented here need to be considered carefully by the reader.