What is Merit Pay?

money on chalkboard
••• Copyright : Cristian Baitg/E+/Getty Images

Merit pay is a pay increase based on goals or achievements set by an employer, rather than a pay rate based on a union contract or a defined pay scale for a position. It is also known as pay for performance. 

Merit pay typically involves the supervisor meeting with the employee to discuss the employee's work and to award an increase or a bonus based on performance.

Pay for performance is often used in sales or marketing fields to reward high performers with incentives and extra pay.

There are both advantages and disadvantages, but overall merit pay is becoming an increasingly popular way to reward and encourage employees.


  • Merit pay is a good way to keep tabs on your expectations of the employees and their performance. 
  • It can show effort in short time projects or unique events such as a seminar, a one-time project or sales expo.
  • Merit pay can separate the individual from the group, and in that way employers can see which employees are doing well and how they are performing in comparison to the rest. 


  • It can be hard to accurately determine which employees are performing best relative to their position. Creating a standard for merit pay can be time-consuming for Human Resources and that time may be better spent on recruiting new employees to bring in more profit. 
  • The constant evaluation may turn into micromanagement, leaving employees feeling scrutinized and anxious. Merit pay intrinsically compliments hard workers on their efforts, but does little to create a conversation between supervisor and employee about career growth or problems at work.
  • Employee-employee relations may suffer because each person is so focused on outperforming his or her neighbor

Merit pay and pay for performance can create a healthy sense of competition in employees. Rewarding hard workers will further encourage them to continue and will give lower-performing individuals a goal to strive for.


Also Known As: pay for performance, variable compensation

Related Articles: Wages and Salary Information | Pay and Paychecks | Employment Law