Merit Pay and Automatic Pay

Paper Summary:

In this article, the writer explains that merit pay, or pay-for-performance, compensation schemes base employee pay raises on their performance instead of awarding pay increases or bonuses automatically based on periodic raises according to schedule. The writer maintains that in principle, merit pay motivates higher performance because the eligibility for pay raises is determined by relative performance. The writer then discusses that in many cases, this is true, but merit pay is more likely to generate problems not associated with automatic pay systems in certain industries. The writer maintains that generally, merit pay is best suited to industries where performance is measured strictly by output. The writer concludes that certain vocational environments are more likely to benefit from merit pay than others, but in all cases, effective management oversight is necessary to ensure the positive outcome envisioned by merit pay system proponents.

Outline:
Abstract
Automatic Pay Systems Issues
Merit Pay System Issues
Industry-Specific Merit Pay Issues
Conclusion

From the Paper:

"To a certain extent, merit pay reward systems can re-establish
elements of this psychological connection to vocational achievement by providing a means through which workers can once again be motivated to perform their best work, provided only that some objective criteria exists for measuring output.
"To illustrate, where a farmer produces milk and eggs for competitive sale at a profit over his costs, there is a very direct relationship between his commitment to his work (as represented by the volume of his milk and egg output) and his compensation. The more he works and the more efficiently he works, the more he earns for his efforts. Conversely, where a secretary works at the headquarters office of a large industrialized corporate farming company, there is little connection, and therefore little direct psychological reward for performing well on the job."

Sample of Sources Used:

• Daft, R. (2005) Management 7th Edition. Mason: Thomson South Western.
• Dillon, S. Long Reviled, Merit Pay Gains Among Teachers; The New York Times. (June 18, 2007). Retrieved August 2, 2008 from: http://www.nytimes.com/2007/06/18/education/18pay.html?_r=1&pagewanted=2 &oref=slogin
• Gerrig, R, Zimbardo, P. (2005) Psychology and Life. 17th Edition. New York: Allyn & Bacon.
• Gray, I. (1987) General and Industrial Management. (Revised from Fayol's Original) Belmont: David S. Lake Publishers.
• Lee, C. Bush Aims to Expand System of Merit Pay Unions Criticize Plan Based on DHS Model; The Washington Post, July 19, 2005. Retrieved August 2, 2008, from:http://www.washingtonpost.com/wp- dyn/content/article/2005/07/18/AR2005071801476.html

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