Merit Pay or merit-based pay is defined as a payment or a reward that is given to the highest performing worker.
Merit pay is designed to reward and recognize the employees who perform best in their roles for exceeding expectations. To define merit pay, stations have to figure out the objectives.
Once the objectives are figured out, then the employees can be aligned with the objectives. It is suggested that the organization should come up with a strategic plan for the entire year and then break it down according to departments.
This way, the individual employee will be clear on his achievements, goals, and objectives and his part in competing for merit pay.
Accommodating for Flexibility
When it comes to formulating proper merit pay, the organization should be flexible. This becomes important when the organization is in a very competitive industry. There could be many competitors waiting to get the people in your organization. In such cases, unfair merit pay will only push the existing employees and talent out of the organization. The market is very volatile, and it changes rapidly.
Things that are launched today are becoming obsolete within a brief period. The lifespan of the product has gone down drastically and in such cases, keeping the employees on their toes without losing them is a challenging task.
Therefore the organization should always be flexible when it comes to designing merit pay. If the employee deserves it, the increase should happen. Also, if the employee is underpaid compared to his colleagues, it requires a merit pay adjustment. In all of these cases, merit pay comes in handy.
The organization should also opt for merit pay because markets fluctuate rapidly. The pay scale of competitors keeps changing, which necessitates the change of merit pay for all of the organization to match them.
Standard Merit Increase
The standard merit increase for every organization differs. While it was around 3% in 2018 and 3% again in 2019, the organization may provide more orders depending on various factors. It also depends on what they can afford and the other perks which the employee is getting.
For example, an organization may offer market pay, which is significantly less as compared to other companies but will provide additional benefits like time off, insurance, fewer working hours, etc. these intangible benefits will make up for the difference. It will also give the benefit of working for the top employer to the employee. Other companies may offer some other benefits like a free gym membership, paid leave, etc.
The pay will vary from organization to organization. For example, if an employer has given maximum payment to the employee, then he can offer some other benefits which will compensate for the increment.
Merit Increase vs. Pay Rise
Merit pay is dependent on the performance of the employee. The better the employee performs, the more pay he will get. The name itself is the definition of merit pay. On the other hand, pay raise is simply an increase in the employees’ salary on the duration that he spends in the organization. It is also given sometimes as a part of the cost of living adjustments.
Whenever an organization wants a job to be done quickly, merit pay is the best way to go. It gets the job done faster and benefits the organization. For example, if an organization wants to increase sales in a specific area, it can offer short-term quarterly payout schemes based on the employee’s performance. The higher the sale, the higher, will be the payment. This way, the organization can get things done in a short time.
On the other hand, a pay rise is a sure shot thing that will be implemented at the end of the financial year. Although the percentage of pay rise may differ from organization to organization and is entirely dependent on the timing, it has more surety of happening than merit pay, which is more unpredictable.
Advantages of Merit Pay
Merit Pay is significant to motivate employees. It guarantees success and helps them to achieve their aim. The individual merit pay system is very clear in making employees understand how their efforts are linked directly to the reward. To achieve a particular reward, they have to put in certain efforts.
Individual employees find merit pay more useful more than groups. Employees want to be treated and compensated fairly according to their performance. That is why they put more effort into achieving their merit pay.
2. Increasing the bottom line
A merit-based pay structure is designed to improve employee performance, but there is another effect on the organization. Whenever an organization wants to improve its bottom line, then they push and motivate their employees by offering merit-based variable pay.
The employees are encouraged to achieve and exceed expectations in terms of their target after activity goal to get a better paycheque. When employees start to work more than their best, the organization’s bottom-line increases, thereby increasing organizational profitability.
The incentive-based structure of variable pay works when employees are motivated, and this ultimately results in the organization performing better than the competition.
3. Employee retentions
Employees are the talent of the organization. Talent is essential for performance and sustainability in the market. However, certain times it happens that employees get lured by other companies who offer better pay.
In such cases, merit-based pay will help to retain the employees in their existing rules. They are designed to make employees feel secure about their job as well as for performance improvement. This also results in a productive workforce.
Disadvantages of Merit Pay
- Most of the time, merit pay is decided on the subject of the judgments of the supervisor. And not every time those judgments would be correct.
- Employee favoritism is a problem when it comes to merit pay. The relationship of an employee with his supervisor may create a problem and undesirable competition. If an employee has good relations with his supervisor, then, if the employee gets good merit pay by working hard, he gets blamed for favoritism.
- Merit pay is usually subjective and cannot be quantified accurately. When compared to the basic pay or salary, merit pay is subject to different variations.
- After merit rating, the employees are placed into a competitive position for salary increase. This will accentuate the competition between employees, and they may go against many organizational ethics to get good pay.
Merit pay is a vital scale to reward employee performance. It is as simple as ‘Do this to get that’ and plays a very crucial role in motivating employee behavior. The pay is different for every company, but it should be a part of the pay structure. Amongst other advantages, it helps to motivate and retain the employees and prevent talent drainage from the organization.
Alternatively, check out the Marketing91 Academy, which provides you access to 10+ marketing courses and 100s of Case studies.