Merit-based Pay

In a world where competition for skilled labor is a big concern, managers of modern-day organizations have realized the significance of motivating employees adequately. Generally, there are two types of motivation: extrinsic and intrinsic. Extrinsic motivators are largely material; they include salary increments and other monetary incentives. In a bid to keep employees motivated, different systems of payment or compensation have been developed, one of them being merit-based pay (also known as incentive pay or performance pay). Ritter and Barnett (2013) define merit-based pay as a form of compensation in which workers are paid according to their performance effectiveness. In practice, this means that employees who record the highest level of performance in an organization are given higher salaries than their counterparts; they may also receive additional rewards like bonuses. Conflict viewpoints have been given regarding the effectiveness of this mode of rewarding and motivating workers. Heathfield (2017, para.2) firmly asserts that “merit pay is the best way to reward the employees that you most want to keep [as it] sends a powerful message about what you want to see from employee performance and contribution”. In reference to this assertion, this paper presents the hypothesis that despite its benefits, merit pay is not, by itself, sufficient to build and sustain loyalty and organizational commitment among employees. The paper draws opinions and sentiments from various scholars to support and validate this hypothesis.

Advantages and disadvantages of merit pay

Before proceeding to justify or defend the hypothesis that organizational commitment, employee retention and loyalty are determined by a horde of factors other than pay, it is important to look at the strengths and weaknesses of the incentive pay system of compensation. Regarding the strengths, Heathfield (2017) argues that merit pay reinforces the behaviors as well as actions that employers desire in their workers. At the same time, it encourages employees who may not be performing well or meeting the standards set by their employer to put more effort. In the words of Heathfield (2017, para.5), “when employees hold conversations with their supervisors about their top merit increase, they learn all of the contributions and actions that are most valued by the organization”. Naturally, this will make employees more enthusiastic about meeting their supervisors’ expectations.

Another advantage of the merit pay structure is that it allows employers to make one-time recognition of individual performance. In other words, employees who take part in one-time projects- which may include implementing a novel system of doing things or launching a new product- can have their performance assessed and rewarded through this system (Heathfield, 2017). This is why the merit pay structure has been described as being ideal for people working in sales companies (Guettler, 2018). On a different note, merit pay is said to be a great strategy of motivating workers in the sense that it provides a direct linkage between ambition and individual effort. Guettler (2018) states that merit pay compensates workers as individuals rather than as groups. Consequently, workers are aware that the compensation and treatment they receive from their employers is based on individual performance. Because of this, employees will be motivated to work harder.

Merit pay structures also help to increase a company’s bottom line. This is in light of the fact that this compensation formula is pegged on clearly-defined standards, which may be about improving sales, greater output, or serving customers to their satisfaction. If employees clearly understand the standards set by their employer and are assured that the employer will reward them if they meet or exceed these standards, they will demonstrate greater willingness to meet or exceed goals, the motivation being a bigger paycheck. Due to this passion and motivation, organizations are able to exceed set goals and outperform their competitors (Guettler, 2018).

The connection between merit pay and retention has been mentioned by Guettler (2018), who argues that when employers see that employers are rewarding their effort and contribution, they are naturally likely to remain with the company. This way, employers can retain the most talented and competent employees in the industry. The benefits of this are felt by the employer as well as employees: the employer is assured that he/she provides workers with an environment that fosters efficiency and effectiveness, while employees are assured that their efforts are valued.

The above benefits notwithstanding, merit pay has been criticized for its negative impact on intrinsic motivation among workers. It is argued that “when people are paid on the basis of performance, the pay reduces the amount or pleasure or intrinsic motivation they receive from performing the task” (Heneman & Werner, 2000 p.46). In short, when merit is the basis upon which compensation or rewards are given, employees will just strive to beat deadlines and meet targets regardless of whether or not they derive pleasure from doing so. Another concern about merit pay is that it is a barrier to cooperation within organizations. This compensation structure has been observed to foster conflict instead of encouraging teamwork (Heneman & Werner, 2000). The explanation for this is that in merit pay, workers are evaluated and rewarded according to individual performance rather than group performance. As such, members of a given group may end up competing with one another, which could breed conflict. It is worth mentioning that although some conflicts or competition in organizations are productive, the kind of competition that arises from merit pay can be damaging, more so in situations where employees must depend on each other to complete tasks (Heneman & Werner, 2000).

Another serious weakness of merit pay is that it can cause low self-esteem among employees, especially those who consistently do not receive positive ratings and the subsequent rewards (Heneman & Werner, 2000). When this happens, it goes without saying that employee productivity will drop significantly due to the demotivation that results. It is also unfortunate that merit pay structures breed payment inequalities. In an article titled ‘Multiple Disadvantage and Wage Growth: The Effect of Merit-pay on Pay Gaps’, Woodhams, Lupton, Perkins and Cowling (2015) take issue with the observation that merit-pay structures promote prejudices, reason being that disadvantaged groups are excluded from accessing merit. In addition, this compensation formula legitimizes and reinforces hierarchies within the organization, and this results into gaps between members of the same organization. The claim that merit pay breeds bias has been tested and validated by Castilla (2008), who reports that employees doing the same kind of work under the same boss receive different salary increases.

Apart from the weaknesses outlined above, merit pay is also confronted by a number of implementation and feasibility challenges. For instance, it has been established that it is not possible to accurately differentiate employee performance to decide upon the person who deserves merit pay. More precisely, assessing performance of employees cannot be done 100% accurately. More importantly, the contributions as well as accomplishments that are deemed most desirable are virtually never measurable (Heathfield, 2017). This means that supervisors and managers must rely on their opinions and judgments when deciding on merit pay. This is perhaps one of the reasons why merit pay is said to breed bias and prejudice.

Another challenge associated with merit pay is that its computation consumes substantial time together with energy. To be able to measure performance so that merit pay can be given, managers are required to develop competencies, performance baselines, and metrics. The time as well as energy spent on these tasks could as well be used in delivering customer service or doing other activities that generate greater value to the firm (Heathfield, 2017). Lastly, merit pay is ineffective when applied in organizations where effective communication is a problem. Heathfield (2017) posits that some managers are better communicators than others, and that without excellent communication, employees will not understand why their performance has been rated the way it has been rated.

Having highlighted the strengths and flaws of merit pay, it is now necessary to support the hypothesis that merit pay is, by itself, insufficient for building employee loyalty and retention. The concepts of organizational commitment, employee loyalty and retention have widely been studied. Different authors present different ideas regarding ways of building organizational commitment and loyalty, thereby retaining valuable employees. A common view shared by most authors is that employee loyalty and organizational commitment are how satisfied employees are with their employer or the job they do. Narrowed further, organizational commitment is attributed to two sets of factors: the job and the individual. Mathis and Jackson (2010) postulate that issues such as job design and elements have a great influence on how committed to the organization employees are. At the same time, the magnitude of support and motivation that employees get, coupled with their abilities and expertise, also determine their willingness to stay in a given organization. Based on this, it can rightly be said that rewarding employees on the basis of their performance is only one of the many strategies that managers should embrace in a bid to retain top talent.

In a study done among Vietnamese workers, it was established that organizational commitment is influenced by five factors, namely promotion, work, supervisors, payment, and colleagues. In light of these findings, it was concluded that managers can enhance loyalty among employees by fostering good relationships between workers and superiors, demonstrating sympathy for employees’ personal affairs, creating a healthy, conducive working environment, offering a competitive remuneration package, and providing regular training and employee development programs (Anh, Dong, Kreinovich & Thach, 2018).

Conclusion

It would be grossly pretentious and misleading to depict monetary rewards to employees in a negative manner. It is a matter of common knowledge that satisfying basic needs is one of the main reasons why people seek employment. This is to say that before employers think of meeting the intrinsic needs of their employees, they should first make sure that their extrinsic desires are well taken care of. Nonetheless, focusing entirely on extrinsic motivators is not a good way of boosting employee morale and retaining valuable workers in the organization. The disadvantages and challenges associated with merit pay have provided a strong case for this argument. The conclusion arrived at in this paper, therefore, is that besides merit pay, concepts such as employee development, healthy employer-employer relationships, and a favorable working environment must be fostered at all times.

References

Anh, L. H., Dong, L. S., Kreinovich, V., & Thach, N. N. (2018). Econometrics for financial applications. Cham, Switzerland: Springer.

Castilla, E. J. (2008). Gender, race, and meritocracy in organizational careers. American Journal of Sociology, 113(6), 1479-1526.

Guettler, A. (2018). The advantages of merit pay. Available at http://smallbusiness.chron.com/advantages-merit-pay-24332.html

Heathfield, S. (2017). The advantages and disadvantages of merit pay. Retrieved from https://www.thebalancecareers.com/the-advantages-and-disadvantages-of-merit-pay-1919083

Heneman, R., & Wener, J. M. (2000). Merit Pay Linking Pay to Performance in a Changing World. Charlotte: Information Age Publishing.

Mathis, R., & Jackson, J. (2010). Human resources management. South-Western Cengage Learning.

Ritter, G. W., & Barnett, J. (2013). A straightforward guide to teacher merit pay: Encouraging and rewarding schoolwide improvement. Thousand Oaks, California: Corwin.

Woodhams, C., Lupton, B., Perkins, G., & Cowling, M. (2015). Multiple disadvantage and wage growth: the effect of merit pay on pay gaps. Human Resource Management, 54(2), 283-301.

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