What Is Merit Pay (Or Pay For Performance)?

May We Recommend...

Merit pay refers to the process of determining employee compensation (base salary or bonuses), in part, on the basis of how well each employee performs at work. The principle is simple, at least in theory. It makes sense to reward more productive employees for their increased contributions to the organization, in the interests in fairness, but also with an eye to trying to retain the best employees in a company.

Merit pay (or pay for performance) can take several basic forms. First, annual salary increases can be based on some sort of assessment of the employee's productivity (however that might be measured). Those judged as "better" will receive greater salary increases which maintain over the years. The second method of rewarding "superior" employees is to use a bonus program or system, where a very productive employee will receive some sort of bonus payment, which is a one time, non-recurring event.

The third approach involves direct compensation for quantified production. In a factory setting, for example, an employee may receive a "piecework" rate -- being paid x dollars for the production of each ten items. In essence, that's supposed to reward those that work faster. Or, there's a commission structure, such that you'd find in real estate industries. The more you sell, the more you get paid, and the "pay for performance" is actually built into the entire system. In the direct compensation for quantified production, one nice thing is that the link between objectively determined production and pay or compensation is clearer, better defined and requires less judgment.


About Company

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.


Robert Bacal

Bacal's Books
About The Company
About Our Performance Management Philosophy
Privacy Policy

Our Related Websites

Leadership Resource Center
Upgrade your understanding of modern leadership in a complex world. Stay current.

The Planning Resource Center

From strategic planning for businesses, small and large, right through to financial planning for millennials, stay current with the latest thoughts and actions on planning.

Bacal & Associates Store
Free and paid guides, books, and documents on business, management and more.

Small Business Resource Center

For anyone who owns, runs or would like to start their own business. Filled with advice, tips, articles.

We Believe

  • 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?

Get in Touch

  • Phone:
    (613) 764-0241
  • Email: ceo@work911.com
  • Address:

  • Bacal & Associates
  • 722 St. Isidore Rd.
  • Casselman
  • Ontario
  • Canada, K0A 1M0