Chapter 19: A Survey of Merit Pay Plan Effectiveness: End of the Line for Merit Pay or Hope for Improvement?

Source: Reprinted with permission from Human Resource Planning, 19(2), 1996. Copyright 1996 by The Human Resource Planning Society, 317 Madison Avenue, Suite 1509, New York, NY 10017, Phone: (212) 490-6387, Fax: (212) 682-6851.

The widespread use of merit pay plans by organizations is a continuing source of debate, with some arguing for and others against the effectiveness of merit pay plans. A survey of senior compensation professionals in 72 organizations was conducted to examine the effectiveness of merit pay in achieving organizational objectives. The results indicate that merit pay is seen as being “marginally successful” in influencing employee attitudes (e.g., pay satisfaction) and behaviors (e.g., performance) which represents a decrease in effectiveness compared to a survey conducted 10 years ago where merit pay was seen as “moderately successful.” Merit pay practices shown to be related to improved merit pay plan effectiveness include clarifying the link between pay and performance for the employee by increasing the frequency of appraisals, establishing developmental action plans, and developing a formal merit pay policy with safeguards to ensure employee perceptions of fairness. It is concluded that unless improvements are made to existing merit pay plans they are likely to cease to exist due to a failure to add value to organizational effectiveness. It is recommended that merit pay play a more limited role in organizations and be used to support alternative reward strategies such as gainsharing, team-based pay, and profit sharing.