CRM 200 Lecture Notes - Lecture 11: Merit Pay, Lump Sum, Performance Appraisal
3 May 2018
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Chapter Eleven - Pay for Performance Plans
• 3rd arrow on employee contributions
Pay for Performance [P4P]
• link pay to productivity, profitability, or some other measure of individual, team or
organizational performance
• Also called variable pay plans
• effective pay-for-performance plans = Accurate performance appraisal or measurable
outcomes
• can have a positive impact on performance designed well
• Can be Individual, group or organization-wide plans and short-term or long-term
o Attach outcome (how much you pay) to a measure (appraisal)
o Calendar term – jan to dec
o Fiscal year – can vary within companies
Why Variable Pay?
• Potential talent shortage – employers need tools to attract, motivate and retain
their valued employees.
o Advantages for Employers:
▪ Motivate better employee performance
▪ Manage total compensation costs
▪ If cant achieve goal = don’t get paid = don’t get paid
▪ Align business and individual goals
▪ Employer = give money
▪ Employees = want money
o Advantage for Employees:
▪ Performance are rewarded accordingly
• Public = mostly based pay
• Private = still base pay wins but have more P4P
o senior also have more P4P compared to the lower ppl
Specific Pay-for-Performance Plans: Short Term
1. Merit pay
2. Lump-sum bonuses
3. Individual spot awards
4. Individual incentive plans
1. Merit Pay
• increases in base pay to how highly employees are rated on a performance evaluation.
• Employee achievements are rewarded every year the employee remains on the job.
o Raise you get based on past performance
o Every year is different because every year your performance level might be
different
• Merit pay is expensive.
o Compounded over time
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find more resources at oneclass.com
• Many argue it does not achieve the desired goal of improving employee and corporate
performance.
o Because once you get the same pay for a while, youll think its normal = small
motivation
• Merit pay does have a small, but significant, impact on performance.
Managing Merit Pay
• Improve accuracy of performance ratings
• Allocate enough money to truly reward performance
• Make sure size of merit increase differentiates across performance levels
Requirements to Link Pay to Performance
• Specify a continuum describing different levels from low to high on performance
measure
• Decide how much of a merit increase is given for different levels of performance
Designing Merit Guidelines
• What should the poorest performer be paid as an increase?
• How much should average performers be paid as an increase?
• How much should the top performers be paid as an increase?
• What should be the size of the percentage increase differential between different levels
of performance?
How to Create a Merit Pay Grid
• Merit Grids Combine 3 Variables:
o Level of Performance
o Distribution of Employees Within Pay Ranges
o Merit Budget Increase Percentage
• Refer to work sheet
• If you give more than giude line =have to justify why and explain to the boss why you
recommend a bigger number. Works with lower too.
2. Lump Sum Bonuses
• Used as a substitute for merit pay.
• Based on performance and received as an end-of-year bonus. Not built into base pay.
find more resources at oneclass.com
find more resources at oneclass.com
• less of an entitlement than merit pay
• Less expensive than merit pay over the long run
3. Individual Spot Awards
• Viewed as highly or moderately effective
• Typically awarded for exceptional performance
o If happen too often = lose meaning
• Give to them when they do something really amazing.
o Right after that assignment is completed, helps them associate your reward to
the things that are done.
o Does’t hae to e oey – can be keychain etc
o have to have really good line of sight
4. Individual Incentive Plans
• Offer a promise of pay for some objective, pre-established level of performance
• established standard for comparing worker performance to determine magnitude of the
incentive pay.
• Advantages and disadvantages of individual incentive plans
find more resources at oneclass.com
find more resources at oneclass.com
