Merit pay

Merit pay refers to a performance-related pay which provides bonuses or base pay increases for employees who hit the target or perform their jobs effectively, according to measurable criteria over a predetermined period of time.

Merit pay definition

Merit pay refers to a performance-related pay which provides bonuses or base pay increases for employees who hit the target or perform their jobs effectively, according to measurable criteria over a predetermined period of time.

Advantages and disadvantages of merit pay

Commonly-cited advantages of merit pay include

– increased effectiveness as a reward is tied to performance

– better company standards due to the recruitment of employees with the skills and confidence to work within a performance-related pay system

– increased retention of key employees who benefit from a pay system that rewards

– enables the employer to differentiate the high performers by giving them a higher pay

– if exceeding targets/expectations employees can be rewarded fairly.

– merit pay system is subjective and may be biased

– employees develop a tendency to expect consecutive pay raises

– competition between employees and acting in self-interest rather than in the interest of the company