Why merit pay doesn't work: Implications from organizational theory
Abstract
Compensation plans that base pay on an individual's recent performance, such as merit pay, enjoy prominence in both the professional compensation literature and in the popular imagination. Such plans have the attraction of clear communication of performance expectations and give employees the opportunity to increase their incomes through their own efforts. That these plans have become synonymous with "fairness" is reflected in the widespread support for President Reagan's call for merit pay for schoolteachers. Compensation textbooks and journals reflect the general belief in these plans through their devotion of substantial space to discussions of the design and implementation of such programs, despite the fact that individual performance-contingent pay makes up a very small portion of most employees' total compensation.
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