Most widely used approach to pay for performance
Problems if . . .
there are poor performance measures
there is little communication (pay secrecy)
there is little range in pay raises
Virtually no research evidence showing it to be effective at increasing motivation
First, they identify individual differences in performance, which are assumed to reflect differences in ability or motivation. By implication, system constraints on performance are not seen as significant.
Second, the majority of information on individual performance is collected from the immediate supervisor. Peer and subordinate ratings are rare, and where they exist, they tend to receive less weight than supervisory ratings.
Third, there is a policy of linking pay increases to performance appraisal results.
Fourth, the feedback under such systems tends to occur infrequently, often once per year at the formal performance review session.
Fifth, the flow of feedback tends to be largely unidirectional, from supervisor to subordinate.
Merit pay programs link performance-appraisal ratings to annual pay increases.
A merit increase grid combines an employee's performance rating with employee's position in a pay range to determine size and frequency of his or her pay increases.
11. Merit Bonus - Merit pay paid in the form of a bonus, instead of a salary increase.