Chapter 5: Establishing Pay Increases

This chapter discusses how pay increases can be lied to performance— once adequate measures of performance have been developed. Establishing pay increases is the second step in the development and administration of a merit pay plan. To establish pay increases based on performance, two major activities must take place. First, a policy, or set of guidelines, must be developed regarding pay increases and their relationship to performance. Second, this policy needs to be introduced and implemented in the organization. Both topics are covered in this chapter.

In creating a merit pay policy, attention must be given to the size, form, and timing of pay increases that will be linked to various levels of performance. The size, form, and timing of pay allocated to merit increases depends on many factors, including the budget and pay structure. Before considering these issues, the concept of “just-noticeable differences” (JNDs) is discussed, as this is the frame of reference for a sound merit pay policy.