MERIT PAY AND

PERFORMANCE APPRAISAL
SYSTEM

MERIT PAY

Merit pay assumes that employees compensation

over time should be determined , at least in parts
, by differences in job performance.
Most commonly used in U.S.
Its is due to the fact that merit pay fits well with
the U.S cultural ideals to reward individual
achievement.

ELEMENTS OF MERIT PAY

Managers use subjective as well as objective

indicators to determine whether an employees
will receive any merit pay.
As a rule , supervisors give merit increases to
employees based on subjective appraisal of
employees performance.
Supervisors periodically review individual
employee performance to evaluate how well each
worker is accomplishing assigned duties relative
to established standards and goals.

CONSIDERATIONS FOR IMPLEMENTING A

MERIT PAY SYSTEM

Merit pay system isnt appropriate for all

companies.

compensation professionals must consider two

factors:
Commitment from top management
Design of job

1.
2.

CONSIDERATIONS FOR IMPLEMENTING A

MERIT PAY SYSTEM
1).Commitment from top management:
Top management must be willing to reward
employees job performance with meaningful pay
differentials that match employee performance
differentials.

The amount of merit pay increase must reflect

prior performance levels and motivate employees
for exemplary performace.

CONSIDERATIONS FOR IMPLEMENTING A

MERIT PAY SYSTEM
Just-meaningful pay increase:
The pay raise amount should be meaningful to
employees.

It refers to the minimum pay increase that

employees will see as making a meaningful
change in compensation.

The basic premise of this concept is that a trivial

pay increase for average or better employees is
not likely to reinforce their performance or
motivate enhanced future performance.

CONSIDERATIONS FOR IMPLEMENTING A

MERIT PAY SYSTEM
2).Design of job:

Jobs must be designed to accurately measure

employees performance.

Merit programs are most appropriate when

employees have control over their performances
and conditions outside employees control do not
substantially effect their performance.

CONSIDERATIONS FOR IMPLEMENTING A

MERIT PAY SYSTEM
Example:
For sales professional economic recession
generally leads consumers to limit spending on
new purchases.
Sales professionals certainly do not create
recession nor they can help combat consumers
fears.
Similarly, for production workers regular
equipment breakdown leads to lower output.

Furthermore , there must be explicit

performance standards that specify the
procedures or outcomes against which employees
performance can be clearly evaluated.
It includes defining and putting in writing the
major duties of a job and specifying written
performance standards for each duty.
Refer to books example.

PERFORMANCE APPRAISALS

Effective performance appraisal drive effective

merit pay programs.
Administering successful merit pay programs
depends as much on supervisors appraisal
approach as it does on professionals skills in
designing and implementing such plans.

TYPES OF PERFORMANCE
APPRAISAL PLANS

1.
2.
3.
4.

It falls into four broad categories:

Trait systems
Comparison systems
Behavioral systems
Goal-oriented systems

TRAIT SYSTEMS
Trait systems ask raters to evaluate each employees traits or
characteristics .
It includes:

Quality of work
Quantity of work
Dependability
Cooperation

Judgment
Leadership responsibility
Decision-making ability
Creativity

Initiative
o Appraisals

are typically scored using descriptors ranging

from unsatisfactory to outstanding.

TRAIT-ORIENTED PERFORMANCE APPRAISAL

RATING FORM EXAMPLE
Employees name:

Employees position:

Supervisors name:

Review period:

Instructions: For each trait below, circle the phrase that best
represents the employee.
1.
a.

2.
a.

3.
a.

4.

Diligence
Outstanding b. Above average c. Average d. Below average e. Poor

Cooperation with others

Outstanding b. Above average c. Average d. Below average e. Poor

Communication skills
Outstanding b. Above average c. Average d. Below average e. Poor

Leadership

a. Outstanding

b. Above average c. Average d. Below average e. Poor

ADVANTAGES OF TRAIT SYSTEMS

Easy to construct and use
Easy to apply
Can be used for a wide variety of jobs.

Increasingly employed in in companies that focus

on the quality of interactions with customers.
Example: leon leonwood Bean referred to
necessity of positive customer service as core
business rule.

LIMITATIONS
1. Trait systems are highly subjective as they are
based on assumption that every supervisors
perception of a given trait is the same.
Example:
The trait quality of work may be defined by one
supervisor as the extent to which an employees
performance is free from errors.
To another supervisor, it might mean the extent
to which an employees performance is thorough.

LIMITATIONS
2. Another drawback is that system rates
individuals on subjective personality traits rather
than on objective job performance data.

Trait assessment focuses on employees rather

than on job performances.

COMPARISON SYSTEM

Evaluates a given employees performance against

that of other employees.
Employees are ranked from best performer to
poorest performer.
In simplest form, supervisors rank each employee
and establish a performance hierarchy.
Types

Forced

distribution
Paired comparisons

COMPARISON SYSTEM
Forced distribution:

Assigns employees to groups that represent the

entire range of performance.
A forced distribution approach rater must place a
specific number of employees into each
performance group(best performer , average
performer , poor performer)

FORCED DISTRIBUTION PERFORMANCE

APPRAISAL RATING EXAMPLE
Instructions: You are required to rate the performance for the previous 3 months of the 15
workers employed as animal keepers to conform with the following performance
distribution:
15 percent of the animal keepers will be rated as having exhibited poor performance.
20 percent of the animal keepers will be rated as having exhibited below-average
performance.
35 percent of the animal keepers will be rated as having exhibited average performance.
20 percent of the animal keepers will be rated as having exhibited above-average
performance.
10 percent of the animal keepers will be rated as having exhibited superior performance.
Use the following guidelines for rating performance. On the basis of the five duties listed in
the job description for animal keeper, the employees performance is characterized as:
Poor if the incumbent performs only one of the duties well.
Below average if the incumbent performs only two of the duties well.
Average if the incumbent performs only three of the duties well.
Above average if the incumbent performs only four of the duties well.
Superior if the incumbent performs all five of the duties well.

COMPARISON SYSTEM

Many companies use it to minimize the

supervisors tendency to rate most employees as
excellent performers.
This tendency arises out of supervisors selfpromotion motives.

DRAW BACK OF COMPARISON

SYSTEM
It can distort ratings because employee
performance may not fall into these
predetermined distributions.
Lets assume that a supervisor must use the
following forced distribution scheme:

15 pc well below average

25 pc below average
40 pc average
15 pc above average
5 pc well above average

DRAW BACK OF COMPARISON

SYSTEM

If 35 pc of employees performance was either

above average or well above average , then the
supervisor would be required to underrate the
performance of 15 pc employees.
Based on it, supervisor can rate only 20 pc of the
employees as having demonstrated well-above
average or above average job performance.

COMPARISON SYSTEM
Paired comparisons:

Supervisors compare each employee to every

other employee, identifying the better performer
in the pair.

In example below, Allen Jones is the best

performer because he was identified most often
as the better performer followed by Bob Brown
and Marry Green.

PAIRED COMPARISON PERFORMANCE

APPRAISAL RATING FORM EXAMPLE
Instructions: Please indicate by placing an X by which employee of each
pair has performed most effectively during the past year.

__X__

__X__

Bob Brown

__X__

Mary Green

Jim Smith

Bob Brown

Mary Green

Jim Smith

__X__

Bob Brown
__X__

Mary Green

Allen Jones

Allen Jones
Jim Smith

__X__

Allen Jones

COMPARISON SYSTEM

Best suited for small groups of employees who

perform the same or similar jobs.

Example:
it would be difficult to judge a production worker
against a secretarys performance as both jobs
are substantially different.

LIMITATIONS

Encourage subjective judgments which increases

chances of errors and bias.
Small performance differences between
employees may be exaggerated by using a method
if supervisor feel compelled to distinguish
amongst level of employee performnace.

BEHAVIORAL SYSTEMS

Rate employees on the extent to which they

display successful job performance behaviors
(effective job performance).
Three main types of behavioral systems include:

1).CIT
2).BARS
3).BOS

BEHAVIORAL SYSTEMS
Critical incident technique:
It requires employees and their supervisors to
identify performance incidents that distinguishes
successful performances from unsuccessful ones.

Supervisor observes the employees and record

their performance on critical job aspects.
A critical incident can be described as one that
makes a contributioneither positively or
negativelyto an activity or phenomenon.

BEHAVIORAL SYSTEMS(CIT)
The critical incident method of performance appraisal
involves identifying and describing specific events (or
incidents) where the employee did something really
well or something that needs improvement.
It's a technique based on the description of the event
and does not rely on the assignment of ratings or
rankings, although it is occasionally coupled with a
ratings type system.

The use of critical incidents is more demanding of the

manager since it requires more than ticking off things
on a form the manager must actually write things
out

BEHAVIORAL SYSTEMS(CIT)

Following table illustrates a CIT form for an

animal keeper job.
Two statements represent examples of ineffective
job performance (number 2 and 3). Other two
represent (1 and 4) examples of effective job
performance.

CRITICAL INCIDENTS PERFORMANCE

APPRAISAL RATING FORM EXAMPLE
Instructions: For each description of work behavior below, circle the
number that best describes how frequently the employee engages in
that behavior.
1. The incumbent removes manure and unconsumed food from the animal
enclosures.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
2. The incumbent haphazardly measures the feed items when placing them in the
animal enclosures.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
3. The incumbent leaves refuse (garbage) dropped by visitors on and around the
public walkways.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
4. The incumbent skillfully identifies instances of abnormal behavior among the
animals, which represent signs of illness.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often

ADVANTAGES AND LIMITATIONS

It tends to be useful as procedure requires

extensive documentation that identifies
successful and unsuccessful job performance
behaviors by both employee and supervisor .
CITs strength also serves as its weakness.
Implementing CIT requires continuous and close
observation of the employee.
Record keeping can be overly burdensome.

ADVANTAGES AND LIMITATIONS

Negative incidents may be more noticeable than

positive incidents
It results in very close supervision which may not
be liked by the employee.

BEHAVIORAL SYSTEMS(BARS)
Behaviorally anchored rating scales (BARS):
o Behaviorally Anchored Rating Scales (BARS) are
designed to bring the benefits of both qualitative and
quantitative data to the employee appraisal process.
o

BARS compare an individuals performance against

specific examples of behavior that are anchored to
numerical ratings.
For example, a level four rating for a nurse may require
them to show sympathy to patients while a level six
rating may require them to show higher levels of empathy
and ensure this comes across in all dealings with the
patient.

BEHAVIORAL SYSTEMS(BARS)
Based on CIT with one exception.
incidents are written in BARS as expectations
to emphasize the fact that the employee doesnt
have to demonstrate the exact behavior that is
used as an anchor .

CIT: incumbent completed the task in a timely

fashion
BARS: incumbent is expected to complete the
task in a timely fashion

BEHAVIORALLY ANCHORED RATING SCALE

EXAMPLE
Instructions: On the scale below, from 7 to 1, circle the number that best describes how
frequently the employee engages in that behavior.
7 The incumbent could be expected to clean the animal enclosures thoroughly and remove
refuse from the public walkways as often as needed.
|
6
|
5 The incumbent could be expected to clean the animal enclosures thoroughly and remove
refuse from the public walkways twice daily.
|
4
|
3 The incumbent could be expected to clean the animal enclosures and remove refuse from
the public walkways in a haphazard fashion twice daily.
|
2
|
1 The incumbent could be expected rarely to clean the animal enclosures or remove refuse
from the public walkways.

LIMITATIONS

Difficulty of developing and maintaining high

volume of data .
BARS still involves RATINGS, and ratings still
have inherent flaws.
Another problem is that there is a tendency for
people to believe that BARS system ratings are
objective, and that is definitely not the case.
Ratings cannot, by definition, be objective, because
they involved labeling and generalizations.

BEHAVIORAL SYSTEMS(BOS)
Behavioral observation scale (BOS):

Documents positive performance behaviors on job

dimensions

Employees rated on exhibited behaviors

Ratings averaged for overall rating

Developed in same way as BARS, except that it

only incorporates positive perfromance.

GOAL ORIENTED SYSTEMS (MBO):

A management model that aims to improve

performance of an organization by clearly
defining objectives that are agreed to by both
management and employees.
Employees are appraised on how well have they
achieved the goals.
Mainly used for professional and managerial
employees.

GOAL ORIENTED SYSTEMS (MBO):

Process of MBO:
1. Employees and supervisors together determine
objectives tied to corporate strategies.
2.

Employees are expected to attain these objectives during

a rating period.

3.

At the end of rating period, employees write report

explaining his/her progress toward accomplishing
objectives.

4.

Employees supervisor appraises employees

performance based on accomplishment of the objectives.

GOAL ORIENTED SYSTEMS (MBO):

Management by objectives can promote effective

communication between employees and
supervisors.
Despite the importance of managerial employees
its often difficult to establish appropriate
performance goals as many companies simply do
not fully describe the scope of these positions.

GOAL ORIENTED SYSTEMS (MBO):

Limitation:
1. On the downside, it requires a constant flow of
information between employees and supervisors
hence becomes time consuming.
2.

It only focuses on the attainment of particular

goals often to the exclusion of other important
outcomes. This drawback is called as result at
any cost mentality.

GOAL ORIENTED SYSTEMS (MBO):

For example an organization might use number

of units produced as the performance measure as
it is fairly easy to quantify.
Workers focusing on the quantity may neglect
quality and follow-up services as the long term
measure of organization's success.