Sept. 8, 2019 • 2 min
Companies often link pay increases to a measure of performance to motivate and retain the best employees, which may also ensure the companies long-term success. Among many forms of individual performance-related pay, the most popular is merit-based pay. Under such a system, an employee's pay increase is based on a supervisor's assessment of performance over a previous time period, usually the prior 12 months. The annual cycle of the pay scheme begins with the establishment of performance objectives, either by the supervisor or jointly between the employee and the supervisor. Progress is monitored over the ensuing months, and the supervisor rates the performance of an employee, on a given scale, against these objectives. Each of these rating points is then associated with the amount of a pay increase, expressed as a percentage, so the higher the rating, the higher the pay increase. The size of the pay increase can also vary depending on the position in the pay range. Typically, employees at the bottom of the pay range with high-performance ratings will get a larger increase than an employee near the top of the pay range with a high-performance rating. In some cases, the intention is to enable the employee to reach the top of the pay range at the same time as he or she is ready to be promoted. The difficulty is that this system is not supported by all employees. Research has demonstrated that merit-based pay is attractive to some occupations, for example managers, and to certain demographic groups, such as white-collar workers, high-income earners, and younger employees, but it might not be the best payment approach for all occupations and companies.