5 Important Benefits of the Merit Compensation System

5 Important Benefits of the Merit Compensation System

Paying employees has always been a tricky matter for employers. Fail to have a generous compensation system and there’s a big chance that your people will soon feel like they’re not getting properly rewarded for their work. On the other hand, being too generous makes the employer prone to being abused by employees and the rewards tend to become less effective in motivating people to perform better.

There are various compensation plans that you can explore and implement in order to keep your employees motivated, but the merit compensation or merit pay system is really something that you should consider. How does this system work and why should you look into it as an option? Let’s take a closer look to find out.

How Does It Work?

The merit compensation system has a straightforward philosophy: employees that perform above expectations get rewarded with a raise. This is very similar to providing one-time incentives for employees who perform well within a given period of time, although the rewards are more consistent and tend to make a bigger difference in the long run.

In order to work properly, you (the employer) have to define two specific factors. First, you need to be able to establish what counts as “performing better than normal.” Secondly, you need to determine the right amount of compensation for the said expected improvement in performance. As you can imagine, automated merit and salary management tools are valuable in this kind of compensation system because they allow any business to design and manage compensation plans with utmost transparency and flexibility. By using proper technologies, errors can be eliminated, and planning time can be reduced to a minimum.

What Makes It Work?

The merit compensation system is specially designed with cost-efficiency and employee retention in mind. Here are just some of the most important benefits of implementing this type of compensation system.

It preserves the value of good performance

Some compensation systems make the mistake of being too generous, while others yield very little reward to make actively going for incentives worth the effort. On the other hand, a properly implemented merit compensation system provides rewards that employees will always consider as worth going the extra mile.

It encourages employees to stay

Other compensation systems may seem good enough reason for employees to stay, but many of them only provide short-term incentives. This means employees are still likely to leave for other companies since they already benefited from the full incentive. Because a merit compensation system typically rewards employees in the form of salary raises, the value of the reward increases the longer they stay in your company.

It helps you find the right people

Many employers today realize the value of nurturing their employees’ careers. Because performance metrics are integral in a proper merit compensation system, you now have the means of sorting employees based on their individual performances. From there, it’s possible to single out the most promising employees and further develop their skills for promotion.

It encourages people to perform better

A merit compensation system rewards people based on their individual performance, instead of focusing only on the top performers. This means every employee has a chance to earn rewards for doing well despite the presence of star performers. Because there’s always the chance to be rewarded, employees are more likely to actively improve their performance.

It’s cost-efficient when done right

With the right tools and proper metrics, the merit compensation system is one of the most rewarding, yet cost-effective systems available. Since rewards are based on salary increases, you don’t get situations where lots of employees suddenly qualify for an incentive that would cause irregularities on how you manage resources

The merit compensation system is a more balanced approach to keeping employees motivated and improving employee retention. If you’re still looking for the best way to reward your employees, this option should be high on your priority list.

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