HR Pulse - Spring 2008 - (Page 38) Accomplishing Exceptional Performance The Myth of Merit Pay By Lee Elliott and Mike McIntosh 38 HR Pulse Spring 2008 As W. Edwards Deming pointed out, “There is no substitute for leadership.” Certainly, merit pay cannot be substituted for strong leadership. n the realm of compensation, it is commonly assumed that people do things so that they can get more pay. This is something of a fundamental assumption of compensation programs. Unfortunately, it is not at all apparent that this assumption is always a true reflection of reality in the world of work. A commonly used approach to compensation is to vary pay raises based on the outcome of an employee’s performance appraisal—so-called merit pay systems. There are some overwhelming fl aws with merit pay that dramatically reduce its effectiveness as a tool to motivate performance at work. Consider just some of the fl aws of merit pay that make it less than optimal for establishing accountability. I Flaw 1: Performance appraisal systems are seriously fl awed. When considering the psychometrics of performance appraisals, one comes away with discomfort about the extent to which these assessments are fully credible. (In fact, there are so many fl aws that it is difficult to ethically justify impacting an employee’s standard of living based solely on the results of a performance appraisal.) To the extent that an employee believes that the performance appraisal is unfair, the resulting reduction in his/her pay raise may serve to frustrate the employee thereby leading to reduced performance and diminished trust of the supervisor.
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