Merit Pay and Performance Based Compensation

Merit pay is a performance based pay system whereby employees are paid based on how effective their performance is.  It is best known in the educational system but organizations also use this system in combination with performance appraisals to determine annual increases.

In the education system, it is believed that merit pay helps schools with lower socioeconomic status attract qualified teachers. It is also believed to help retention by rewarding high performing teachers with better pay increases.  Likewise, in organizations, employees with higher performance appraisal ratings will typically benefit by receiving a higher percentage of increase. 

Those that oppose merit pay believe that it lowers teacher morale because it creates competition between and among teachers.  They are also opposed the cost of time and resources to administer the plan.

According to Ed Lawler, an academic expert in Human Resources, money is a motivator to employees for the following reasons; employees attach a high value to pay, they believe good performance will result in higher pay, they have enough control over the job that their own efforts can have a material impact, and they believe that superior performance leads to more positive than negative results (e.g. more acceptance than rejection by coworkers).

I personally believe in the idea of a performance based pay system.  I think the following quote by Frederick Taylor, founder of the school of scientific management, sums it up perfectly, at least in my experience.  "The common tendency to 'take it easy' is greatly increased by bringing a number of men together on similar work and at a uniform standard rate of pay.  When a naturally energetic man works for a few days beside a lazy one, the logic of the situation is unanswerable. 'Why should I work hard when that lazy fellow gets the same pay that I do and does only half as much work?'”

It is my belief that people (employees) rise or fall to the expectations put before them.  If merit pay systems create competition, those that are willing and capable of rising to the challenge will and merit pay systems support this natural tendency.