Academic journal article Public Personnel Management

Merit Pay in a Public Higher Education Institution: Questions of Impact and Attitudes

Academic journal article Public Personnel Management


Article excerpt

Merit pay has been a hallmark of pay for performance programs in organizations for years. (1) Merit pay systems are based upon the idea of well-communicated, pre-determined standards providing a greater reward for those performing at a higher level. This link between pay and performance symbolically demonstrates to all employees the organization's commitment to reward top performers. (2) Organization success is enhanced when pay systems support their strategic objectives because pay practices are a visible and effective method to communicate strategic goals to employees. (3, 4)

The underlying philosophy of merit pay is to reward outstanding performers with higher base pay rates. This tactic attempts to unite employee interests with that of the organization. Operant conditioning, expectancy, and equity theories represent psychological theories supporting merit pay. Agency, implicit contract, and efficiency wage theories represent economic theories supporting merit pay. A commonality among all theories is that that they purport that linking pay to performance enhances organizational outcomes.

Psychological Theories

Operant conditioning theory asserts that the amount and timing of incentives are key components in predicting an employee's response to merit pay. (5) Under the operant conditioning theory, superior performance that is rewarded through incentives, like merit pay, will be reproduced. (6) Expectancy theory stipulates that employee effort under merit pay plans is determined by the extent to which there is a visible tie between employee performance and merit pay incentives. (7) According to expectancy theory, in order for merit pay to be successful, rewards must be identified and understood in advance to motivate employees during the appraisal period. (8) Equity theory purports that people require that earned outcomes match their efforts. Equity theory also states that the ratio between employees' inputs and merit rewards need to be equivalent to the ratio garnered by others who serve as comparisons to the employee. (9)

Economic Theories

Agency theory strives to align employee rewards with organizational objectives. (10) To the extent merit pay is aligned with organizational objectives, employees will seek rewards that benefit both themselves and organizational objectives. (11) Implicit contract theory notes that job performance varies between employees. Those employers who pay identical wages to all employees will be incurring additional costs by overpaying those employees who produce the least. (12) According to this theory, merit pay represents an implicit contract. Employees are assumed to produce at different levels of performance. By measuring employee performance levels, merit pay is allocated to employees on the basis of their contributions to the organization. (13) Efficiency wage theory asserts that performance is a product of higher wages. Premium wages are paid to employees to encourage performance at their maximum capacity. Efficiency wage theory suggests that high merit pay levels encourage employees to perform maximally because of the inability to find comparable wages with other employees. (14, 15)

Reward principles to improve merit pay's effectiveness include allocating enough money to saliently reward performance and ensuring that merit pay increases differentiate across performance levels. (16) Merit pay plans have been successful when outcomes associated with the merit pay plan are assessed and this information is incorporated into the system. (17) A compilation of evidence from the private and public sector shows that when these performance management and compensation principles are followed, merit pay plans are associated with enhanced organizational effectiveness. (18, 19)

The prevalence of merit pay programs is widespread in both the private and public sectors. The percentage of corporations using a variation of merit pay plans for some segment of their workforce is reported to be near 100 percent. …

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