Business Performance Blog

We share our news and reflections on the world of business.
Join our discussion on the latest research, reports and opinion.

Merit-based Pay and Employee Motivation

Submitted by  on October 24th, 2010

How are you paying and rewarding your employees? Is your system based on seniority; on how many years the person has worked for your organization? Or are you paying on merit; on the value the employee delivers to your business? Are you thinking about moving from your current system to a merit-based system?

I urge you to put in a lot of serious thinking before you adopt a merit-based pay model. More generally, what pay system will work best in any given organization will depend on its history, culture, employee tasks and management preferences, to name but a few variables. There is no one single answer to the question of which pay system works best in an organization.

Although merit-based pay has prima facie plausibility, it works well in but a limited number of situations. Such employee motivation systems have come in for a lot of critical scrutiny of late. These are the main points offered by its critics:

  1. Paying employees on merit rests on an inaccurate view of what motivates workers. Managers are mainly motivated by challenge, interesting work and respect from peers. Most managers, on the other hand, believe that it’s different for their people; that mere employees are motivated principally by money.
  2. Financial incentives can actually lower performance where creativity and judgment are required by diverting an employee’s focus from the task at hand. Monetary rewards work in limited situations where the task steps are clearly defined and the job is rule-based.
  3. Most problems in organizations are caused by systemic deficiencies. Focusing on individual motivations diverts much needed attention away from fixing problems with the system.
  4. Organizational effectiveness these days depends more and more on the collaboration of people within and between organizational units. Improving how people operate in teams is more effective than focusing on the performance of individuals.

Traditionally, the quality movement has been a main critic of individual merit-based pay. Refer to the works of W. Edwards Deming in particular. More recently, Jeffrey Pfeffer has had a lot to say about the ineffectiveness of financial rewards. Tread carefully and review the literature before making changes that you may live to regret.


Posted in Change, Communication, Performance, Talent | Comments (0)

Leave a Reply

Share This

  • twitter
  • facebook
  • linkedin
  • googleplus
  • gmail
  • delicious
  • reddit
  • digg
  • newsvine
  • posterous
  • friendfeed
  • googlebookmarks
  • yahoobookmarks
  • yahoobuzz
  • orkut
  • stumbleupon
  • diigo
  • mixx
  • technorati
  • netvibes
  • myspace
  • slashdot
  • blogger
  • tumblr
  • email
Short URL:



Recent Posts