Merit based pay, put another way, is “pay for performance.” In a merit based pay system, the employer, usually in conjunction with the employee, establishes a performance plan and levels of reward based on degree of accomplishment relating to assigned duties and tasks, or other job criterion. IBM is a company which uses a merit based pay system and provides an excellent model for this discussion. In the 1980’s, IBM’s organizational management approach and merit based pay system was adopted by many companies in Japan and around the world.
In the IBM system, a new hire sits down with his or her direct manager for an initial performance planning session almost immediately. The employee is introduced to the concept of pay for performance as the manager explains what is expected of the employee with respect to job proficiency standards. In most cases, such standards are gleamed from statistical data amassed on other employees doing the same or similar tasks. This provides a degree of objectivity to the managers evaluation.
PERFORMANCE REVIEWS and APPRAISALS
The assessment of employee accomplishment, with respect to performance plan criterion objectives, is carried out with performance reviews, usually on a quarterly basis, and an annual formal appraisal session. A new hire will generally receive their first formal appraisal after three months, establishing their performance base line. During a formal appraisal session, each of usually four or five areas of job performance criterion is assessed a performance level value of 1-4.
PERFORMANCE LEVELS
Performance levels provide a good and clear assessment of job performance. IBM uses four categories, defined as (1) Consistently Far Exceeds, (2) Consistently Exceeds, (3) Meets Requirements and (4) Does not Meet Requirements. Some IBMers have affectionately coined a slightly altered nomenclature for the companies performance levels; a “1,” performs major miracles, and walks and talks with God providing consultation on matters of great importance, a “2 “ performs minor miracles and regularly talks to God, a “3” performs the occasional miracle and talks to God on rare instance, and finally, a “4” is not on speaking terms with God and in need of a miracle to keep his job.
PAY GRID
IBM uses a pay grid matrix to divvy out raises to employees. Where an employee falls within the matrix depends on pay grade (rank) and performance rating. IBM system has an employee raking system similar to the military’s, divided into two groups, “exempt” and “non-exempt.” Exempt pay grades are those of salaried employees, equivalent to officers in the military. The non-exempt employee ranks would then be tantamount to the military’s enlisted ranks. Each pay grade has a range of pay amounts and the amount of an employees raise and how often he or she will receive them depends on where their performance level puts them. Thus, a “1” performer is going to get more raises more often then a “2” or “3” performer at the same pay grade.
ALTERNATIVE COMPENSATION CURRENCIES
Most often, we think of the pay check as the primary reward for doing a good job, but there are other ways an employer can offer inducements to employees. In a merit based pay system, the top performers are going to get the cream when it comes to bonuses and perks, and those performing at lower levels will receive little more than a good case of envy. Whether it is promotions, informal cash awards, special assignments and away from the job opportunities such as seminars or even recreational perks, the best performers are going to get them.
IBM’s merit based pay system is a pretty good one from the employees perspective. Other companies using pay for performance methods way have a similar system or do it a different way. The bottom line is, that to the employees advantage, a merit based pay system offers more autonomy on the employees part to influence the size of their pay check. The employee knows exactly what is expected of them as well as how they will be rewarded for meeting or exceeding the expectation. Furthermore, the merit based pay system does not pit employees against each other and lessens the tendency manager favoritism and other subjective assessments.
In short, merit based pay is about the fairest and most equitable of all forms of employer inducement. The best performers get the best pay and perks. While it does require a substantial amount of overhead ti implement, it also provides employers with a highly motivated work force. It’s a win-win proposition for employee and employer as well.