The Merit Pay Approach to Compensation: Will It Fit Your Business?

Cash incentives and other bonuses are crucial means to keeping employees motivated. By continuously rewarding individuals who exceed designated quotas or milestones, you can easily push your entire team to perform at their absolute best.

However, relying solely on temporary commissions-based incentives like these aren’t always best for keeping your top employees. These high performers might prefer long-term raises, better job titles, or better opportunities to develop their careers. This is when a different system may do a better job at motivating your team.

Rewarding Performance

A lack of openings for managerial positions can prevent you from handing out promotions for deserving employees. Meanwhile, your organization may lack the resources for additional training programs to help develop and retain talent. Thankfully, you can still rely on an alternative means to keep your best employees happy and loyal: a merit pay system.

Using a merit pay system rewards your leading performers with long-term salary increases instead of periodic bonuses—regardless of job titles or time spent with the company. This approach puts performance results above all else, with the reward being a permanent increase in the employee’s base pay. However, it comes with its own set of advantages and disadvantages.   

What Merit Pay Does Well

Key among the benefits of instituting a merit pay system is that it helps you keep your star employees more easily. After all, the permanent nature of the reward vastly increases its value over one-time bonuses. It also provides a financial means of encouraging the development of future leaders who can help push the company forward.

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Additionally, having a merit pay plan that’s easily accessible by everyone allows each individual to see how their performance compares with their peers. It is important to note that this can be done without having to publicize everyone’s compensation packages. You also don’t have to worry about a difficult transition to such a system. With the technologies available today, you can automate your merit compensation plan to allow your company to ease into the system without hassle.

Why You Might Want to Stick to Bonuses

However, it’s best to point out that a merit pay system comes with a few drawbacks that could make it a bad fit for your organization. Chief among these disadvantages is the increased cost. After all, instituting a merit pay system will cost a lot more money in the long run.

There are also some limitations with determining a fair and accurate way to determine who is most deserving of a merit-based increase. This could open the possibility of rewarding an undeserving employee. A person could also attempt to game the system by working hard to get the reward, only to let their work stagnate after. 

The Final Word

In the end, the merit pay approach is not a guaranteed fix-all for everyone. You can’t deny that the long-term nature of the reward can prove to be a strong source of motivation. However, keep in mind that this may not be ideal for companies on a tighter budget. What’s more, long-term rewards system based on shorter evaluation periods doesn’t do much to discourage performance drop-offs down the road. Getting a good grasp of your team’s dynamics and your company’s financial situation will help you determine if a merit pay will suit you or not.