Academic journal article Public Personnel Management

Merit Pay Plans in Higher Education Institutions: Characteristics and Effects

Academic journal article Public Personnel Management

Merit Pay Plans in Higher Education Institutions: Characteristics and Effects

Article excerpt

Merit Pay Plans in Higher Education Institutions: Characteristics and Effects

Little empirical data exists regarding the effectiveness and the nature of merit pay plans in higher education institutions. It is not known if merit pay plans, in general, have a positive impact on levels of faculty motivation and performance. Additionally, little is known about the typical characteristics of merit plans in higher education institutions. Some types of merit plans may be more effective than others because of the way they are designed and implemented. The general purpose of the current study was to address these informational needs.

Literature Review

The Link Between Merit Pay and Performance

A good deal of research has investigated the effects of merit pay plans on employee performance in private sector organizations. The empirical evidence indicates that merit pay plans generally lead to higher levels of employee and organizational performance. (1) A relatively recent meta-analysis of the research literature also suggested that the impact of financial incentives may be greater on performance quantity than quality. (2)

No research, to date, has empirically investigated the impact of merit pay plans upon the performance levels of faculty in university settings. However, some studies have surveyed the extent of use of merit plans in Canadian and in U.S. universities. (3) Some research in university settings has also investigated faculty perceptions of problems with merit pay plans, and faculty levels of dissatisfaction with such plans. (4)

Specific Characteristics of Merit Pay Plans

Some of the literature on merit plans has also dealt with and discussed specific characteristics or features that may be critical to the success of such plans. Nine potentially important characteristics are: 1) the size of the merit pay increase amount, 2) the size of the merit pay distinctions between varying levels of rated performance, 3) the type of performance appraisal method or format that is used, 4) the source of the appraisal (superior or peers), 5) whether formal feedback is provided, 6) whether pay increases are made public, 7) whether adjustments are made for past appraisal periods, 8) the general salary level of the institution, and 9) the presence or absence of a union or collective bargaining agreement.

Most compensation scholars believe that the size of the merit pay increase is important, and that large percentage increases are needed to motivate employees to perform at a higher level. (5) The size of pay distinctions between varying levels of performance is also thought to be important. A merit pay plan that makes larger pay distinctions between its low, average, and high performers should lead to greater motivation and performance. (6)

Scholars also believe that the accuracy of the performance appraisal rating (which is the basis of the distribution of merit pay) is critical to the success of merit pay plans. (7) The accuracy of the appraisal rating depends, in part, on the performance appraisal method or format that is used. For example, some of the more behaviorally specific, concrete appraisal methods are thought to be better than some of the more subjective appraisal methods or formats. (8) The accuracy of the rating may also be related to the source of the appraisal. Some feel that the supervisor constitutes the best source of valid appraisal ratings, while others believe that peers or coworkers are able to provide more reliable and valid appraisal ratings. (9)

Scholars also believe that formal feedback of the performance appraisal results is important to the success of merit pay plans. (10) If accurate, objective, and concrete behavioral feedback is provided in the appraisal meetings, employees' understanding and acceptance of their ratings should be greater, and motivation should be higher. Another feature of merit plans that may influence their effectiveness involves the degree to which the actual merit pay increases are made public. …

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