Merit pay | Meaning and Definition

What is Merit Pay?

Let’s understand what merit pay means. Merit pay, also known as performance-based pay, is an incentive awarded to employees as a pay rise, promotion, or bonus whenever they manifest splendid performance at work. It is provided to employees that meet the criteria established by the employer. Usually, merit pay is observed in the sales team, where salespeople are furnished with a bonus for performing well or accomplishing a target.

 The company institutes criteria to assess the performance of an employee in a given time period. HR managers evaluate the progress of employees, have frequent check-ins with them, and deliver feedback.


Advantages of merit pay

  •   Employees are provided pay as an appreciation for their performance and hard work.
  •   Employees sense that companies grasp their worth and thus, derive a feeling of satisfaction at the workplace.
  •   Employees get to know the company’s criteria and tools for measuring performance.
  •   Facilitates improving employee turnover, as the company recognizes and rewards high-performing employees, and thus, they choose to stay.
  •   Being strictly performance-based, the merit pay system eradicates the seniority factor in pay.


Disadvantages of merit pay system

  •   Often, it can trigger unhealthy relationships at the workplace, such as employees will bear jealousy and competitiveness, thus, leading to a lack of cooperation.
  •   It can trigger stress among workers where they may become hopeless and pessimistic as they may sense the standards as impossible to achieve.
  •   Several companies prefer to invest the time spent on developing and implementing the merit pay program in customer satisfaction and engagement.
  •   Since performance criteria are applied to every employee, and the rates of merit pay are subjective, the chances of favoritism in the workplace are fairly high. Even in a scenario where performance is objectively evaluated, the performance and success of employees may rest on the external factors.
Get 20% off
HR & Payroll Software