Achieve More, Earn More: The Merit Pay Advantage

Once I joined the working world, it didn’t take long for me to figure out that things simply aren’t fair.

I saw people who weren’t good at their jobs receive promotions simply for their seniority. 

I saw executive salaries soar, while the people doing the actual work languished in low wages. 

Again and again, I watched my employers drive out our top-performing staff members because they were miserly with raises and bonuses. 

That system sucks, for a lot of reasons. But there is an alternative that’s been around a long time, and has been gaining popularity in recent years: Merit pay. 

In businesses that use merit pay, workers are rewarded not for their seniority or background, but on how well they perform.

Sound enticing? If so, this article will tell you everything you need to know about merit pay.

 

What is merit pay?

Merit pay is a method of providing pay increases and promotions based on individual and team performance. Employees within a merit-pay system will have clear goals and timelines to meet for pay increases, which are provided on top of their base salary either as permanent pay increases or regular bonuses. 

Note that merit pay is different than the typical bonus structure many businesses have. Most companies will provide bonuses and pay raises to their employees—the difference is what factors they use to determine those raises. 

Some businesses may use seniority to determine pay raises, meaning anyone can get a raise if they just stick around long enough. Others may determine salary amounts based on the degree someone holds or the previous jobs they’ve had. Others may only give bonuses on holidays or once a year. 

☝️ None of those structures count as merit pay. 

Instead, with merit pay, businesses use performance as the primary method of determining who gets raises when and how much salaries go up.

 

How does merit pay work?

Though the specifics of a merit pay structure will vary from business to business, some hallmarks will be consistent across the board. 

Employers will have a clearly defined list of goals for individuals and/or teams in the business, all centered on performance. These will be set against a specific timeline. When targets are met within the timeline, employees will receive a pay increase and/or bonus. 

Those are pretty vague guidelines, so let’s look at a few examples of merit pay structures:

As you can see, merit-based pay can take many different formats. It can be a bonus-incentive structure, or a way of providing ongoing pay increases. Either way, it can have some major advantages for employees.

 

What are the advantages of merit pay?

Merit pay has increased in popularity in recent years, because employers recognize that younger generations demand better compensation and are more likely to leave jobs when they aren’t happy. 

Here are some of the biggest benefits merit pay brings to the table:

 

Newer employees have a better chance of getting pay raises 

In a merit pay system, the focus is on performance, not seniority.

Employees who excel in their roles can expect to see their compensation increase, regardless of how long they’ve been with the company. 

This is particularly advantageous for new or inexperienced employees.

Even if you’re at your very first job, you’ll still receive additional pay if you perform to the standards set for you. There is no “waiting period” for merit pay—it only comes down to how well you perform. 

By the way, if you’re new to the workforce, be sure to check out these resources: 

 

Top-performing employees are guaranteed better pay 

I’ve worked at jobs where working extra hard and performing better meant one thing: you got more work.

No extra pay, no new title, no recognition from management—just more work on your plate, and maybe some fresh gray hairs.

With merit pay, that’s not an issue. If you work hard and perform to standard, you will be compensated, no matter what.

 

Employees have more visibility on their pay structures 

One of the great things about merit pay is that it brings transparency to your earnings.

You’ll have a clear understanding of how your pay is determined because it’s tied directly to your performance. This transparency eliminates the guesswork and uncertainty that can often come with traditional compensation structures.

You’ll know exactly what goals you need to achieve and the timeline for those achievements. This visibility allows you to track your progress and work towards your financial goals with confidence. No more wondering when or if you’ll see a pay increase—it’s all laid out for you.

 

Employers are held accountable for pay structure 

In a merit pay system, employers are accountable for creating a fair and performance-driven pay structure. They can’t rely on seniority, favoritism, or arbitrary decisions to determine pay increases. Instead, they must establish clear goals and performance metrics.

This accountability ensures that your hard work doesn’t go unnoticed or unrewarded. It encourages companies to invest in their employees’ development and success, creating a culture where performance is valued and recognized.

 

Merit pay can increase camaraderie among staff

When everyone in the workplace knows their efforts directly impact their compensation, it fosters a sense of teamwork and camaraderie. Employees are more likely to collaborate and support each other in achieving common goals.

The shared understanding that hard work leads to better pay can create a positive and motivating work environment (something that can be hard to come by!). It encourages employees to work together towards success, knowing their collective efforts benefit everyone.

 

What are the disadvantages of merit pay?

Merit pay certainly has its advantages, but there are drawbacks to the structure that you should be aware of as well. 

 

It’s not always easy to measure merit

Assessing employee performance accurately can be challenging (unless you work in a position with a clearly defined pay structure, such as a sales job).

Different roles have varying responsibilities, and it’s not always straightforward to determine how much value each employee contributes.

This can lead to potential biases or subjectivity in the evaluation process, which may result in some of those unfair systems I mentioned at the top of the article.

 

Merit pay can foster negative feelings among employees

In a merit pay system, not everyone receives the same pay increase.

This discrepancy can create unhealthy competition (or even jealousy) among colleagues, which in turn can harm workplace morale and team dynamics.

Employers must be on the lookout for any of this negativity, and find ways to counteract it so company culture isn’t damaged.

 

Some employers may use merit pay as an excuse to underpay staff

Watch out for employers that use their merit pay system to justify offering lower base salaries.

While performance-based bonuses are a valuable component of compensation, they should not be used as an excuse to pay employees less than their market value. It’s crucial for employees to ensure that their base salary is fair and competitive.

 

What to look for before accepting a merit-pay job

If you’re still reading, perhaps you’ve decided the advantages of merit pay outweigh the disadvantages. If so, here’s a quick guide you should keep handy when looking for jobs, to make sure the merit pay structure is legit. 

 

Landing your next merit-pay job

Though merit-pay jobs are becoming more and more commonplace, they’re not always easy to come by. However, if you’re very interested in this concept, there are certain areas you can look into to get there faster. 

You could consider the path I ended up following: freelancing. It’s not exactly merit pay, but the concept is the same: With no employer running the show, my income depends solely on the output and quality of my work. If this interests you, here are a few guides to check out: 

 

Otherwise, you may want to consider a career in direct sales. Jobs in this sector are far more likely to provide merit-based pay structures. 

Learn more about getting your first job in sales (merit pay included!) with Vector.