What Are the Benefits of a Merit Pay Plan?

Rewards, including pay for performance, can greatly impact an organization.
Rewards, including pay for performance, can greatly impact an organization. (Image: Jupiterimages/BananaStock/Getty Images)

A merit pay plan is an arrangement in which workers receive increased compensation for increased productivity. Productivity levels may be based on a variety of factors, including units produced or number of complaints received, or on financial numbers such as sales. For example, an employee who works in collections may be compensated according to the amount of money she is able to collect within a given time period. Merit pay is a controversial subject in some career fields, but there are a few advantages to implementing a merit pay plan in the workplace.

Rewards High Performers

One benefit of a merit pay plan is that it gives workers the opportunity for increased earnings in return for high performance. When workers perceive that they are paid fairly for the amount and quality of work performed, they are more likely to experience higher levels of job satisfaction. Highlighting the fact that high performers will be rewarded at higher levels than their peers may encourage workers to perform at higher levels in order to obtain those rewards for themselves.

Increased Productivity

Dan Pink, best-selling author and business analyst for news outlets including CNN, CNBC, ABC and NPR, says rewarding employees who perform and punishing those who do not is an effective method of motivating workers who perform routine tasks. The implementation of a merit pay plan for workers involved in day-to-day tasks that require logical and analytical abilities such as spreadsheet skills and similar routine skills may potentially increase overall productivity.

Improved Service

The implementation of a merit pay plan in some career fields may have the benefit of improving service for customers and clients. For example, a 2006 study conducted by David Figlio and Lawrence Kenny of the National Bureau of Economic Research found that teacher incentives have a positive impact on student achievement. However, it is important to note that for service to be impacted by the merit pay plan, the plan must be based on customer outcomes. This was the case in Figlio and Kenny’s study, in which teacher merit is based on student performance.


While the implementation of a merit pay plan may have many benefits, it is essential to understand that merit pay is not appropriate for every situation. Pink says merit pay is “a terrible form for motivating people to do creative conceptual tasks.” Additionally, many of the measures used to determine merit, and consequently merit pay, are subjective. In other words, the success of a merit pay plan in many situations depends largely on the fair and objective judgment of employees by managers and supervisors whose opinions may be affected by their own personal biases.

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