Benefits of Performance-based Compensation/Merit pay

Merit pay, also known as pay-for-performance, is defined as a raise in pay based on a set of criteria set by the employer. This usually involves the employer conducting a review meeting with the employee to discuss the employee's work performance during a certain time period. Merit pay is a matter between an employer and an employee

The issue of merit pay has remained a subject of considerable debate in both the private and public sectors. A business organization must evaluate the pros and cons of merit pay carefully while devising its pay policies for the employees. Conventional wisdom in business has usually favored the existence of merit or performance linked pay. However, the downside of this pay system often gets ignored. Each organization is unique and it must evolve the best pay method that matches its needs in the best possible manner.

Merit pay has traditionally been one of the most effective tools of motivating employees to perform to the best of their ability. It is recognition for the employees who achieve the highest productivity and results for the business. A monetary reward in terms of a better pay is the strongest incentive for an employee who is working with a greater enthusiasm, commitment and skills than the other employees around him.

In absence of a merit based pay system, there is the risk of non-motivation for the highest performing employees. Talented employees are aware of their strengths and like to accept the challenges of a performance linked pay. If they find that all employees are awarded a uniform pay without any regard to individual merit, there is a risk of the best performing employees leaving and joining other organizations that are willing to recognize their exceptional talent.

Although there are some negative aspects to Merit pay i.e, competition amongst colleagues, resentment from those who feel unfairly left out, etc., there are many benefits to performance-based pay/Merit pay and should at least considered for any wage and benefit program.

http://www.brighthub.com/office/human-resources/articles/109185.aspx