Merit pay versus automatic pay raises

Merit Pay

THE ADVANTAGES of MERIT PAY OVER AUTOMATIC PAY RAISES Abstract:

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. In principle, merit pay motivates higher performance because the eligibility for pay raises is determined by relative performance.

In many cases, this is true, but merit pay is more likely to generate problems not associated with automatic pay systems in certain industries. Generally, merit pay is best suited to industries where performance is measured strictly by output. Industries where performance is measured by standards capable of being manipulated or emphasized artificially are susceptible to unintended negative consequences if there are opportunities for employees to become overly focused on maximizing their pay raises Automatic Pay Systems Issues:

Automatic pay raises provide psychological security for employees because their pay raises are awarded according to a predictable pattern or a specific pay increase schedule. One traditional argument for automatic pay raises is that since salary increases are guaranteed and unrelated to relative performance, employees can focus on satisfying their basic job requirements and without undue competition among coworkers (Daft 2005).

In some respects, automatic pay raises are more appropriate to post-industrial society because the specific vocational responsibilities of many workers are so far removed from the ultimate product of their collective output that it is difficult to quantify their contributions to overall production (Gray 1987). However, the other side of that argument is that the compartmentalization of the typical individual worker's responsibilities and the indirect nature of their relation to production already detracts from some of the main psychological incentives capable of motivating superior performance (Mills 1953). 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.

According to industrial psychologists, the reduction of direct association between vocational performance and compensation contributes to elements of complacency and as well as to the relative inability of workers to derive personal satisfaction from the feeling of a job well done (Gerrig & Zimbardo 2005). In that respect, automatic pay raise systems have been said to virtually guarantee mediocre work performance and a degree of apathy, such as often associated with government employment. For this reason, many federal agencies have begun a shift from automatic pay raises associated with time-in- grade seniority to a merit pay reward system where pay raises are contingent upon performance (Lee 2005). Merit Pay System Issues:

The primary purpose of merit pay systems is to re-establish the connection between measurable work output and vocational motivation on the part of the employee.

In theory, workers who are rewarded for effort, efficiency, and productivity will be motivated to work harder, longer, and more conscientiously than workers who are rewarded exactly the same for mediocre work as for superior work (Russell-Whalling 2008).

Whereas this may be true in certain vocational settings, other types of work environments are less conducive to overall improvements by virtue of a shift from automatic pay raises to a merit pay system. For example, where the output of work is easily quantifiable through objective measurement, such as by units produced or assignments completed in a set time period, merit pay may indeed motivate higher performance levels and better quality effort overall than automatic pay systems.

Therefore, assembly line workers whose individual performance is easily measured by units completed or shift workers whose performance output is easily compared against that of other shifts may benefit the most from the performance motivation element of merit pay increases (Daft 2005). At the same time, merit pay also introduces new areas of potential conflict between coworkers not as commonly associate with automatic pay raise systems. For example, individual workers who must compete with each other for available raises may become overly focused on their own production output to the extent that it undermines the maintenance of the type of working relationships associated with long-term vocational satisfaction. The character of coworker relations is one of the most important determinants of job satisfaction and probably accounts for as much employee turnover as pay issues, particularly in industries and positions that emphasize teamwork and mutual interdependence (Daft 2005).

Competition between coworkers can motivate superior performance, but it is also capable of inspiring detrimental antagonism in at least three specific ways. First, workers whose individual performance output is readily capable of being measured against that of their coworkers may adopt ruthless tactics of sabotaging each other's performance.

Second, workers whose performance is measured by the output of a team are susceptible to intense peer pressure within their own teams; naturally, among different teams, the same risk of ruthlessness exists as in the case among individual workers competing against each other directly for pay raises. Third, even without excessive peer pressure or unfair methods of competition, the fact that some workers receive pay raises while others do not often leads to resentment on the part of the latter toward the former. Finally, where pay increases are determined by superior performance, workers who may be performing perfectly acceptable work and who would have been entitled to regular raises in the automatic raise system may not be compensated sufficiently to continue motivating them to doing work above the absolute minimum level necessary to retain their positions.

Industry-Specific Merit Pay Issues:

Certain types of employment may be particularly susceptible to some of the negative consequences of merit pay raises. The issue has arisen repeatedly in connection with public school education systems and teacher compensation. Specifically, in order to quantify the relative performance of teachers, it is necessary to establish criteria that measure the performance of their students in relation to those of other teachers; after all, the principal product of teachers is the testable subject matter retained by their students.

However, measuring teacher performance for the purposes of eligibility for merit pay raises introduces several issues that are potentially detrimental to the learning environment as well as to their students.

Where teacher performance is associated directly with student test scores, the opportunity presents itself for teachers to purposely focus exclusively on (1) the subject matter being evaluated in connection with teacher performance, and (2) student test scores. The risk is that some teachers will forsake subjects and educational activities that are not tested in connection with evaluating teacher performance for the subjects related to teacher evaluations. This is a legitimate risk that has been demonstrated by numerous reports of teachers changing the entire format of their classes for the sole purpose of achieving compliance with the federal requirements of the No Child Left Behind (NCLB) Act. According to some past experiences with merit pay raise systems for teachers, the change to merit pay resulted almost immediately in the reduction of variety in academic subject matter where teachers exercised their lesson planning authority and choice of subject matter exclusively to the subjects used to test students for the purpose of measuring teacher performance (Murray 2006).

Even worse, in several states, public school teachers have been caught falsifying student test results, both by revealing actual test questions to them during test preparation sessions; in some cases, teachers have actually been implicated for erasing incorrect responses and changing them to correct answers. As pointed out by critics of the merit pay raise system in public education, if educators are motivated to stoop to such levels merely to maintain the federal NCLB performance standards of their educational institutions, they simply cannot be trusted not to do the same where their own financial interests are very directly at stake (Dillon 2007).