How Do the Merit Pay Systems Motivate Employees?

Financial rewards can motivate employees to work harder.
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In addition to basic hourly pay or salary, some companies offer merit pay to encourage employees to work harder or improve their performances. If your employer operates a merit pay system, you will receive a bonus payment or enhanced percentage uplift in your salary if you score a high performance rating. By targeting financial rewards at high-performing employees, companies hope to motivate and retain their top performers.

Internal and External Motivators

    Employees are motivated by a combination of internal and external factors. Job satisfaction and career progression are internal factors that drive employees to perform to the best of their abilities. The level of internal motivation varies significantly between employees. Although many top performers will have high levels of internal motivation, others will be driven by external motivators such as pay and benefits. To get the best out of all of their employees, companies offer external motivators, such as enhanced compensation packages and merit pay systems.

Linking Effort and Reward

    Merit pay systems are designed to motivate employees by providing financial rewards based on employees' personal achievements. If an employee successfully attains her goals and targets she will receive a bonus payment or a larger-than-average salary increase. Merit pay systems can be highly effective if employees see a clear link between the effort that they put in and the reward they receive. To support the merit pay system, the company must put in place a robust appraisal process to set goals and measure performance.

Sharing in the Company's Success

    If a company has an exceptionally good year and earns a tidy profit, employees will naturally want to enjoy some of the rewards. In a merit pay system, the pot of money that is divided between high-performing employees is usually linked to the amount of profit the company makes. By dividing some of its profit among workers, the company can motivate employees to share in its success.

Problems with Merit Pay

    Merit pay systems only motivate employees if they link effort and reward in a fair and consistent manner. If line managers lack the skills to conduct effective appraisals, or if they give employees higher ratings than they deserve to protect their merit pay, the system will become discredited. Often the amount of pay available under a merit pay system is very small, perhaps as little as an additional 1% uplift in wages. Employees are unlikely to be motivated by small variations in pay, but are likely to be demotivated if they do not qualify for merit pay. Once you establish a merit pay system, it is important to implement it consistently and fairly.

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