HR Glossary  >   Merit Pay

Merit Pay

What is Merit Pay?

Merit pay is an increase in the salary and payment made to an employee for achieving the specified target or objective. The employees are evaluated based on metrics set for the targets, and accordingly, the pay is decided. The objectives and targets for metric pay are to be clearly set and communicated to the employees.

For instance,

  • The customer success manager of a company performed exceptionally.
  • He resolved all the queries of customers on time, and no customers' questions were unanswered.
  • Evaluating the performance, managers decided to give him a 10% raise on his base salary.


Frequently Asked Questions

How is merit pay beneficial to the organization?

Offering merit pay is beneficial for the organization as it has a significant impact on employees as well as the organization. The benefits are:

  • Satisfied and motivated employees
  • Creates healthy competition to reach targets
  • Improved productivity and work efficiency
  • Helps company attract top talents
  • It eliminates partiality as it is performance-based pay
  • Reduces employee turnover ratios

What demerits does merit pay bring?

The process of offering merit pay should be done systematically; otherwise, it can bring some demerits to the organization. Some of the disadvantages of merit pay are:

  • It can create unhealthy competition among employees
  • Unplanned pay can lead to an increase in costs to the company
  • Work pressure and burden on employees can increase
  • Sometimes, favoritism can happen while rewarding employees


How does merit pay and incentive pay differ?

The difference is:

Merit Pay Incentive Pay
Given on an individual basis Can be on the individual, group, and team base
Permanent increase in base salary One-time pay
Mostly monetary gains Can be monetary or non-monetary
Based on specific criteria Specific criteria are not always set

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