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Definition of Merit Pay:

Merit pay or performance based pay is the incentive an employee receives as a bonus, pay rise, promotion, whenever they perform the job well based on the criteria set by the employer. Merit pay is usually seen in the sales team, wherein they are offered a bonus on hitting the target or performing well. 

How does Merit Pay work?

With the merit pay program, the company would establish a set of criteria to gauge the employee’s performance in a time period. Managers usually have timely check-ins with them, review their progress, and provide feedback. Merit pay program become successful when companies can back the incentive with accurate data. 

Advantages and Disadvantages of Merit Pay

Like any program that has its pros and cons, Merit Pay has them too. Here are the advantages and disadvantages of using the Merit Pay system in your organization. 


  • Employees receive a pay that appreciates their hard work and performance. 

  • Employees get the feeling that companies realise their worth and feel a sense of satisfaction at the workplace.

  • Employees get a clarity on how the company measures performance and what is seen as good and praiseworthy. 

  • Helps in improving employee turnover, since the company recognises high performance and more employees choose to stay. 

  • It eliminates any seniority based pay since it is strictly performance based. 


  • While the performance criteria is applicable to everyone, the merit pay rates in some companies are subjective. As a result, there are chances where managers can show favoritism. Even if they are objectively evaluated, their success can also depend on the external factors. For example, a Salesperson must have achieved his target, not just because of his abilities, but because of the territory or shift he was working on. 

  • It can sometimes lead to unhealthy relationships at work, where employees get jealous and competitive, and will lead to less cooperation. 

  • It can lead to increased stress among employees, wherein they feel the pressure to perform to impossible standards and worry about job security. 

  • Many companies feel that the time and resources spent on devising and implementing the merit based pay program can be invested in customer engagement and satisfaction. 

How to implement a Merit pay program effectively?

Strategise your Merit Pay program:  Identify how much time and resources you can set aside from your budget on the Merit Pay program. Set the metrics for measuring the performance of the employees and ensure that it aligns with the company goals. Ensure that it is not a part of the regular compensation plans and hikes

Conjoin with departmental heads and create a Merit pay policy: Know how the performance is measured in each department and let everybody know the do’s and don’ts of Merit pay awards and discussions.

Do a timely review of your Merit pay program: Take the opinion of the managers and senior management on how it is faring. Also, try to understand what the employees think and feel about the program. Are they happy with the program, do they feel motivated? Or, do they feel pressurised and compelled to perform to impossibly high standards?