What's The Best Way To Implement Merit Pay or Pay For Performance?

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First, there is no "best" way to link pay or salary to employee performance, and no best way to implement merit pay. There is only a "best" way in your situation or company, and what works in one place may not be best in another. So, you need to decide based on what you want to create, your circumstances, and the culture of your company. However, here's an approach.

Adapted from Performance Management - A Briefcase Book by Robert Bacal (McGraw-Hill)

Acknowledge that no pay for performance system is perfect. Nor is there a perfect way of accurately assessing the value of employee contributions. So, is there a "best way"?

If you want to tie pay to performance, here's how to do it. You make it a part of the performance planning process. You establish the criteria for a pay increase when you set objectives and standards. So, at the beginning of the year, each employee should know what he or she needs to achieve in order to receive teh pay increase or bonus. You don't tie pay to ratings or rankings. you make sure the critera are as objective and measurable as possible to reduce arguments. And, finally, no surprises at the end of the year.

Also, take the position that it is your job (as the manager) to help each employee hit that target, make that extra money, or get the bonus. Make it clear that you'll do what's necessary to help every employee succeed.

In this way, you and the employee work together on the same team.

See Also: Questions About Performance Planning, Goal and Objective Setting, and Setting Performance Standards


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Bacal & Associates was founded in 1992 by consultant and book author, Robert Bacal. Robert's books on performance management and reviews have been published by McGraw-Hill. He is available for consultation, training and keynote speaking on performance and management at work.


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  • Performance management and appraisal MUST be a partnership between manager and employee where BOTH benefit.
  • Performance management can be the lever for improved employee engagement.
  • The review process is the LEAST important part of performance management
  • If managers aren't managing employee performance, why are they there?

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