An employee will perform when he sees a strong connection between his performance and a reward.
A manager is required to evaluate the performance of his/her subordinates, usually on a yearly basis. Their recommendation is the basis for an extra payment – the merit pay.
Merit pay plans allow to differentiate the high performers from the rest and to reward for a non repetitive task. Most researchers agree that they are not really working. The main issue could be that the employee’ performance is judged in a subjective manner by the manager.
The lack of effectiveness comes from:
- Low discrimination distance. When there is no accurate measuring system in place, a manager will have the tendency to equalize the merit pay. This will make high performers unhappy, and low performers confused.
- Merit pay is too small. Because the merit pay is calculated as percentage from the salary, it will go unnoticed, and the level of satisfaction will not act as a motivator.
- Pay level is secret. Merit pay is too. Most of the companies in this world impose a policy of secrecy over wages, benefits and bonuses. I am sure that there arguments in favor of this. But, companies are made of people. When people do not know something they assume or invent. You can be sure that everybody will think that the other is paid better! Job satisfaction and motivation will decrease exponentially. If merit pay is kept secret, none of the employees will know who performs better and how much is performance paid with.
The methods of evaluating performance are evolving all the time. I think that, by now, there are enough objective criteria even to evaluate “the impossible to evaluate in numbers” white-collar employees’ performance. Merit pay could work only if managers give up their royal right of granting rewards and punishment based only on their subjective reasoning.
