What does merit pay refer to?

Merit pay specifically refers to a compensation system in which employees receive pay increases based on their individual performance or contributions to the organization. This system is designed to reward high performers for their efforts and achievements, encouraging employees to excel in their roles. By linking pay to performance metrics, organizations can foster a culture of accountability and motivation, driving employees to improve their productivity and overall effectiveness.

The concept emphasizes individual merit, distinguishing it from other pay increase models that may be influenced by factors such as seniority or company-wide profits. For instance, salary increases based on tenure recognize an employee's length of service, rather than the quality of their work. Similarly, incentives tied to company profits reward all employees based on the organization's financial performance, rather than focusing on individual contributions. A fixed payment for all employees disregards performance altogether and provides the same compensation regardless of an employee's input or results. Hence, merit pay is a targeted approach that aligns compensation with performance outcomes.