Merit Pay: Review

Merit pay is an organizational incentive aimed at the provision of employees with equal opportunities in terms of wage considerations based on their performance. When there are funds available for remuneration operations, the organization may freely consider the most well-performing employees for different bonuses and additional benefits. As the literature on the subject of merit pay suggests, there are numerous advantages and disadvantages linked to this organizational concept (Gross et al., 2015). In general, the key idea behind implementing merit pay is to differentiate high performers across the organization and motivate other employees to perform better. With the help of merit pay incentives, the organization may reward employees for the completion of unique tasks that are rather unlikely to be repeated in the future – for example, the comprehensive implementation of a new system. Merit pay also requires the organization to implement pay scales in order to differentiate the workforce and only pay employees what they are worth.

It may be safe to say that any organization that does not recognize high-performance employees is going to struggle because of the risks linked to the inability to retain competent, well-versed workers. By rewarding skill and contribution to organizational success, companies with active merit pay are protecting themselves against recession and employee shortage. Even though there is an opinion in the literature that merit pay relies on subjective statements, this is one of the most valid instruments for measuring employee performance (Kuvaas et al., 2016). Within the framework of the current paper, the author will review the essential advantages and disadvantages of merit pay to find if favoritism, job insecurity, and issues with team morale arise from the implementation of merit pay. The competition among employees for the most lucrative rewards should not turn into an intraorganizational conflict, so companies have to approach the value of merit pay rather carefully.

Merit Pay Advantages

The essential reason why merit pay is a great approach to organizational expenditures is that employees are rewarded for how they actually perform. This means that a hard-working member of staff will always receive better benefits on the basis of their activities than an employee who barely does anything for the organization. This essential concept stays at the forefront of all business incentives, having more employees perform at a higher level in an attempt to gain access to the benefits that are of interest to them (Park & Sturman, 2016). The fact that a person might get the same salary for doing less work has modern employers wondering if it makes sense to provide both hard-working and lazy employees with identical wages. Merit pay is one of the best possible ways to improve workforce productivity without any additional rewards, as the only thing the employer will have to do is to allocate available resources differently.

On the other hand, the introduction of a merit pay initiative is a clear hint at the advent of healthy competition. It would significantly motivate the workforce to perform better and make sure that their high-quality contribution to organizational success will actually benefit everyone from the employer to other workers. Given to the fact that job requirements and the list of tasks to be completed are usually limited, the presence of merit pay creates a workplace environment where staff members do not waste time on procrastination and do their best to achieve results that are going to make everyone in organization proud of what has been achieved so far (Woodhams et al., 2015). In a sense, the employer gets to see how much they can accomplish with the help of each individual employee and decide whether they want to see them on their team or not.

One more reason why merit pay deserves more attention is the fact that it drives creativity and elicits intelligence. In a sense, the quota system developed on the basis of merit pay initiatives is intended to reward only those who constantly outperform others and contribute in a much more significant way to organizational success. When there are workers who constantly produce a high output, it also encourages less performing employees to review their contribution and make sure that they are doing whatever is required to achieve the best organizational outcomes (Meng & Wu, 2017). Nevertheless, the merit pay system will never punish those workers who only complete the required amount of work and choose not to work overtime in order to process more items or complete additional assignments.

More to say, merit pay is one of the most efficient ways of identifying those members of the staff who underperform. The modern business environment is currently suffering from the prevalence of employees who ‘fly under the radar’ and complete the least assignments to earn their standard wage. In order to avoid paying such workers for procrastination, employers may be free to benefit from the merit pay system and only remunerate those employees whose efforts may actually be seen on the organizational scale (Ruffini et al., 2020). Therefore, the concept of merit pay discloses individual performance stats and helps employers evaluate every worker’s contribution to organizational accomplishments with adequate monetary rewards in the form of salary and bonuses. This would also eliminate all the underperforming workers over time and create a competitive environment where every staff member contributes to the ultimate organizational success.

Merit pay is also a powerful communication instrument that may be used by any organization to let employees know what is expected of them and what are the exact areas where workers have to contribute. The company that knows how to show that its employees are valued is going to succeed majorly. The fact that the individual performance of distinct workers gets recognized by the management would also ensure that one-time benefits will be employed to appreciate the overall contribution (Beardsley et al., 2016). There may be unique projects that have to be completed by the most skilled and knowledgeable individuals. In this case, merit pay is the best way to approach the overall value of the workforce as employees would only be rewarded for what they actually did.

Merit Pay Disadvantages

One of the most challenging issues linked to merit pay is the potential presence of favoritism that would destroy the organizational performance and divide the workforce into two rivaling camps where one part of workers is crucially unappreciated, and the other is overestimated. Supervisors often do not have access to adequate measurable variables, which makes them subjective. In the absence of any satisfactory measurables, no employee will be able to dispute their own performance and certify that intraorganizational rivalry is healthy (Theodorakopoulos & Budhwar, 2015). The process of determining merit pay depends on the supervisor’s decisions, which is a problem because there are no specific ways of warranting an adequate review of employee performance. Workplace conditions could also influence the existence of a specific bias that would turn merit pay into an inappropriate approach to rewarding employees.

Another problematic area that directly relates to merit pay is the inability to implement merit pay without having to allocate additional resources and time that could have been utilized for tasks that are more important. Many companies investing in merit pay have to invest huge amounts of time and energy in order to make their merit pay initiatives work. Such activities may include (but never be limited to) competency development, specialized workforce training, and the introduction of additional measurements and performance baselines (Meng & Wu, 2017). All this could have been effectively replaced with delivering high-quality services to customers, allowing the organization to enrich its customer base and improve their view of the company. The meaning of merit may also become a source of unstoppable discussions on how and why employees have to be rewarded.

As useful merit pay may be in terms of establishing a new communication channel for the organization, there is also a disadvantage linked to the inability of managers to convey all the performance-related information to the workforce in a cohesive manner. The value of the individual contribution is rather hard to spot and trace. Merit pay considerations are usually listed as strict and inflexible, which creates difficulties for both managers and employees, exposing both groups to constant challenges linked to how workers could increase their own performance and motivate other staff members to exert their best effort (Gross et al., 2015). Even if the supervisor is a skilled communicator, the overall effectiveness of the organization is going to decrease because merit pay will always be different across the organization, fluctuating from one department to another. The lack of specific variables intended to help managers measure organization performance turns merit pay into a major disadvantage that is going to divide the team instead of uniting it. The absence of teamwork will ultimately decrease organizational performance and force the company into stagnation.

In addition, there is a problem of teamwork elimination that drastically reduces the overall value of merit pay initiatives. The idea behind merit pay is to motivate workers to perform, but it also drives them away from any collaboration. The focus on individual contributions to organizational success is a serious problem because even a team win symbolizes the competition against other teams. Merit pay is synonymous with a win, but there is always the other side of the coin, as the loser will not receive any rewards at the end of the competition (Park & Sturman, 2016). Without the knowledge on how to implement merit pay properly, the organization would encounter multiple issues related to the lack of teamwork and the absence of adequate interpersonal communication. Furthermore, employees and employers tend not to realize that there is no set definition of an apt recompense, which has them competing for nothing. In a situation like this, employees may feel like they have not received the reward they deserved and reduce their performance.


Based on the information presented within the framework of the current paper, it may be concluded that merit pay is an adequate way of responding to employee performance. Even if there are several disadvantages, such as potential favoritism and issues with organizational communication, the overall state of affairs shows that merit pay is synonymous with improvements and innovation. There are three main reasons why merit pay should be considered by any organization that is willing to improve its performance without investing too much resources in its activities: motivation, increased bottom line, and employee retention. As for the process of motivating employees, the idea is that merit pay shows workers the outcomes of their individual actions and how the latter improve the organization. As an individual bypasses the performance of a group, they get exposed to more fair compensations and rewards intended to motivate them to perform even better.

On the other hand, merit pay is also an adequate way to increase the bottom line of the organization and focus on customer retention and higher sales. Employee commitment is a crucial element of organizational success, and the implementation of merit pay is one of the most lucrative methods of achieving it. When a worker is confident in their performance and future rewards, they will do their best to support the company and secure a major reward at the end of the day. This also leads to the concept of employee retention, where those who outperform all the competition are working hard to get rewarded for what they do as individuals. This way, the company retains the most prominent talents and creates development opportunities for all workforce. An increased level of enthusiasm is ultimately going to lead the company to the development of a highly productive workforce that operates within a robust competitive environment.


  1. Beardsley, A., Pivovarova, M., & Geiger, T. J. (2016). Value-added models: What the experts say. Phi Delta Kappan, 98(2), 35-40.
  2. Gross, T., Guo, C., & Charness, G. (2015). Merit pay and wage compression with productivity differences and uncertainty. Journal of Economic Behavior & Organization, 117, 233-247.
  3. Kuvaas, B., Buch, R., Gagne, M., Dysvik, A., & Forest, J. (2016). Do you get what you pay for? Sales incentives and implications for motivation and changes in turnover intention and work effort. Motivation and Emotion, 40(5), 667-680.
  4. Meng, F., & Wu, J. (2017). Policy expectation moderates the relationship between merit pay policy effectiveness and public service motivation. Social Behavior and Personality: An International Journal, 45(8), 1305-1318.
  5. Park, S., & Sturman, M. C. (2016). Evaluating form and functionality of pay‐for‐performance plans: The relative incentive and sorting effects of merit pay, bonuses, and long‐term incentives. Human Resource Management, 55(4), 697-719.
  6. Ruffini, R., Modarelli, G., Sferrazzo, R., & Turri, M. (2020). Is merit pay changing ethos in public administration? Cogent Business & Management, 7(1), 1-15.
  7. Theodorakopoulos, N., & Budhwar, P. (2015). Guest editors’ introduction: Diversity and inclusion in different work settings: Emerging patterns, challenges, and research agenda. Human Resource Management, 54(2), 177-197.
  8. Woodhams, C., Lupton, B., Perkins, G., & Cowling, M. (2015). Multiple disadvantage and wage growth: The effect of merit pay on pay gaps. Human Resource Management, 54(2), 283-301.

Cite this paper

Select style


BusinessEssay. (2022, January 17). Merit Pay: Review. Retrieved from


BusinessEssay. (2022, January 17). Merit Pay: Review.

Work Cited

"Merit Pay: Review." BusinessEssay, 17 Jan. 2022,


BusinessEssay. (2022) 'Merit Pay: Review'. 17 January.


BusinessEssay. 2022. "Merit Pay: Review." January 17, 2022.

1. BusinessEssay. "Merit Pay: Review." January 17, 2022.


BusinessEssay. "Merit Pay: Review." January 17, 2022.