I was recently asked about merit systems and how they work. The fact is that there are relatively few organizations that implement a true merit system; however, there are many that say they have one. A true merit pay system means that people are rewarded and recognized on the basis of their performance. So when you have situations in which all employees in a specific classification or job are paid the same and get the same raises, as generally occurs in unionized environments for example, there is no merit pay system. Other organizations call pay increases “merit” pay when in fact they really are based on other elements, such as cost of living adjustments (COLAs) or profit sharing. Another reason why there are few truly “merit” programs is that the performance management systems that must assess performance either don’t exist, or they are inadequate, or they are not used, or they are used improperly. When the underlying assessment tool is faulty, the results on which merit pay decisions are made cannot be correct.
To sum up, a true merit pay system works poorly in most organizations, if it exists at all. In unionized settings, including those in public sector organizations, merit pay is seldom seen. While a great concept, merit pay mostly does not live up to expectations.
