Tying Pay to Subjectively Appraised Performance

Think, for a moment, about what it really means to give employees merit increases. Merit increases, even for high performers, often result in negligible weekly take-home pay differences compared to average performers, questioning their motivational impact. The central issue involving merit pay is, “How do we get employees to view raises as a reward for performance?” Organizations often treat merit pay increases as budgetary cost controls rather than motivational tools, leading to guidelines that fail to effectively link pay to performance or shape behavior. Pay increases with low motivational impact include cost-of-living increases, which apply equally to all employees regardless of performance, and seniority increases, which slightly align with performance through time-based progression. Tying pay to performance requires defining performance, often through key competencies that align with strategic objectives, and linking merit increases to employees' ability and willingness to demonstrate these competencies. Establishing merit pay requires aligning performance measures with strategic objectives, defining a continuum of performance levels, and determining appropriate merit increases for each level. As would be expected in a pay-for-performance system, lower performance is tied to lower pay increases. In fact, in many organizations the poorest performers receive no merit increases.