HRM textbook

CHAPTER 12 PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES 397
that it usually becomes part of the employee s base salary, whereas a bonus is a one-time
payment. Although the term merit pay can apply to the incentive raises given to any
employee, the term is more often used for white-collar employees and particularly
professional, office, and clerical employees.
Merit pay is the subject of much debate. Advocates argue that awarding pay raises
across the board (without regard to individual merit) may actually detract from performance,
by showing employees they ll be rewarded regardless of how they perform.
Detractors present good reasons why merit pay can backfire. One is the dubious
nature of many appraisal processes. Since many appraisals are unfair, so too will be
the merit pay you base them on. 23 Similarly, supervisors often give most employees
about the same rating and raise, either because of a reluctance to alienate some
employees or to give everyone a raise that will help them stay even with the cost
of living. (Alienating employees is a problem. Almost every employee thinks he or
she is above average, so getting a below-average merit increase can be demoralizing.)
The evidence is mixed, but tends to support using merit pay. One study focused on
218 workers in a nuclear waste facility. The researchers found a very modest
relationship between merit pay increase and performance rating. 24 Research into
tying merit pay increases to teachers or faculty members research and/or teaching
performance suggest that merit pay is more clearly linked with research productivity
than with teaching effectiveness. 25
The solution is not to throw out merit raises, but to make them more effective.
Among other things, this means establishing effective appraisal procedures and
ensuring that managers tie merit pay awards to performance.
DIFFERENTIAL PAY INCREASES Merit plan effectiveness depends on truly
differentiating among employees. For example, expected base pay increases by
U.S. employers for their highest ranked employees recently were 5.6%, compared
with only 0.6% for the lowest rated employees. Middle rated employees could
expect about 3.3%. The same is true for incentive payouts. For example, the
highest-paid office clerical employees could expect short-term incentive
payouts of 13%, while lowest rated employees could expect 3%, and mid-rated
employees 8%. 26
MERIT PAY OPTIONS Two adaptations of merit pay plans are popular. One
awards merit raises in a lump sum once a year and does not make the raise part of
the employee s salary (making them, in effect, short-term bonuses for lower-level
workers). Traditional merit increases are cumulative, but these lump-sum merit
raises are not. This produces two potential benefits. First, the merit raise is not
baked into the employee s salary, so you need not pay it year after year. Lump-sum
merit increases can also be more dramatic motivators than a traditional merit raise.
For example, a 5% lump-sum merit payment to a $30,000 employee is $1,500 cash,
as opposed to a traditional weekly merit payout of $29 for 52 weeks.
The other adaptation ties merit awards to both individual and organizational
performance. Table 12-1 presents a sample matrix for doing so. In this example, you
might measure the company s performance by, say, sales divided by payroll costs.
Company performance and the employee s performance (using his or her performance
appraisal) receive equal weight in computing the merit pay. In Table 12-1 an
piecework
A system of pay based on the number
of items processed by each individual worker
in a unit of time, such as items per hour
or items per day.
straight piecework
An incentive plan in which a person is paid a
sum for each item he or she makes or sells,
with a strict proportionality between results
and rewards.
standard hour plan
A plan by which a worker is paid a basic
hourly rate but is paid an extra percentage
of his or her rate for production exceeding
the standard per hour or per day. Similar
to piecework payment but based on a
percent premium.
merit pay (merit raise)
Any salary increase awarded to an employee
based on his or her individual performance.