Performance Pay Plan Effectiveness

This assignment delves into the effectiveness of merit pay plans in organizations. It explores the factors influencing their success, including organizational management practices, individual employee motivation, and measurement error. The paper emphasizes that effective implementation requires careful consideration of various aspects to ensure both performance improvement and employee satisfaction.

Running head: Organisational Behaviour 1
Organisational Behaviour

Organisational Behaviour 2
Introduction
Merit pay is recognized as one of the most frequently used ways for paying to the organisational
employees in respect with their individual performance level. The key objective of a merit pay
plan is to have an interconnection to the employees’ performances in such a way that it is
consistent with the organisational goal and mission. There are two specific conditions that are
mandatory for merit pay plan i.e. some sort of variations in the performances of the employees
which measurable in nature and must also be measured. Secondly, the organisational managers
must offer with adequate tools for determining the appropriate recognition and rewards (Gerhart
and Fang, 2014). The paper will highlight the various perceptual problems and biases associated
with the merit pay plan and the ways in which the performance evaluation and success of the
merit pay plan can be improved.
Merit Pay Plan: Perceptual problems and biases and ways to improve
performance evaluation
The merit pay is a specific approach to compensation that is used for the purpose of rewarding
the higher performing employees with incentive pay and additional pay. There are both several
advantages as well as disadvantages associated with implementing merit pay plan in the
organisations. The best use of these merit pay plans is for improving the retention rate of the
employees as well as to motivate them to work harder and retain in the organisation for a longer
period of time (Nyberg, Pieper and Trevor, 2016). There are number of perceptual problems as
well as bias related issued which are associated with the merit pay plans that results in negative
implications for the organisations of taking use of these merit pay plans. There are several
perceptual problems such as stereotype, halo effect, selective perception and contrast effects. In
the merit pay plan, there is a key role of these perceptual problems such as in the stereotype
factor, the managers used to analyse and evaluate the performance of the employees by having a
perception of the group in which that individual belongs. Thus, there are extreme chances that
the merit pays of the employees can diverse and they might be offered an incorrect pay as they
are not analysed in an adequate manner (Den Ouden, Kok and De Lange, 2012). The employees
who are might be hard working and have performed well are not offered incentives because of

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the perception the managers have developed for them because of their group belongingness and
thus it results in de-motivation of the employees (Meier and O’Toole, 2012).
The second perceptual problem is the halo effect as per which the managers develop an
impression or perception of an individual just on the grounds of a unique or single characteristic.
The most negative aspect of this perceptual factor which gives rise to number of issues is that the
managers tend to avoid all other factor and good characteristics of the employees and evaluate
their performance only on the basis of that single aspect. This can be explained as when the
managers evaluate the performance of an individual from the way the person communicate and if
he is not found to be confident then there develops a perception that the performance of the
employee is not good. Thus, such halo effect is one of the major perceptual errors which take
place while rewarding the employees (Johnson, et al., 2013). Other perceptual errors include
selective perception and contrast effects. On the basis of selective perception, the organisational
managers used to evaluate the performance of the individuals on the basis of their own interest,
attitude, experience and background rather than evaluating the performance on organisational
standards. Thus, it develops a strong negative impact on the employees as they tend to loose faith
in the organisation as well as in the reward and merit pays (Hilbert, 2012). The next is contrast
effect where the managers evaluate performances of the employees in comparison with the
performances that have been recently analysed as lower performers or higher performers. This is
also a problem as it is not adequate to compare an individual performance on those
characteristics as it can give a diverse result and may also reward a less competent person with
higher incentives and pays (Deco, et al., 2013).
There are certain biases also which have a direct influence on the merit pay plan of the
organisation. At the time of decision making by the managers regarding the rewards and
incentives to be offered to the employees such biasness occurred and influence the decisions of
the managers. The biases are called as cognitive biasness that are of majorly six types i.e.
memory based biases, statistical based biases, confidence based biases, adjustment, presentation
and situation abased biases. On the basis of these biases there are various which the employees
also tend to influence the managers for getting higher incentives and rewards (Rolls, Grabenhorst
and Deco, 2010). The presence of biasness in the decisions of the managers impact the
employees in the most de-motivating way which increases the workplace place disturbance and

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influence the employees to leave the organisation due to inequitable behaviour and distribution
of incentives and merit pays. Thus, because of presence of all these perceptual errors and biases
there is ineffective and less competent merit pay plan in the organisations (Hensher, 2010).
To improve the performance evaluations as well as the success of the various merit pay plans in
the organizations, there are certain ways and recommendations which the organisations are
required to effectively follow and implement. The first and the foremost step is to develop a
more clear goal and vision statement of the merit pay plan which should be motivating for the
employees to have improved outcome and enhanced efficiency could be seen in their work
(Shields, et al., 2015). The second step is that the managers must adequately measure the
competencies and the results. The results can be measured through analysing the profit and sales
seek by the organisation by the efforts of the employee and the competencies can be evaluating
factor such as communication, initiative and teamwork (Prowse and Prowse, 2010). The next
way to improve the performance evaluation is to enhance the level of transparency as the
decisions and the grounds of decisions regarding pay and incentives must be clear in front of all
the employees. The merit pay plan is also required to be simple rather than complicated so that
the employees can easily understand their individuals’ results and performances. It is also
recommended atht there must be involvement of the teams which developing a framework or
metrics for analysing the performances of the individuals (Bowman, 2010). It is also essential
that there must be a self-appraisal program where the employees themselves can judge and
evaluate their performances as well as the associate positive and negative points so that they can
agree on the pays offered to them. All these ways will improve the performance evaluation of the
employees as well as also increase the success of the merit pay plans in the organisations
(Boachie-Mensah and Dogbe, 2011).
Conclusion
The paper concludes that there is a vital role of merit pay plans in increasing the motivation and
retention of the employees as they offer incentives and additional pays to the employees in
respect with their higher performances which boost their morale to work harder and with utmost
efficiency. But there are several perceptual errors and biases which negatively impacts these
merit pay plans and develops a negative thought process for the employees which force them to
leave the organisation. Thus, there is an essential that the merit pays must be completely free

Organisational Behaviour 5
from these perceptual errors and biases so atht there can be an equitable workplace environment
where all the employees are treated and rewarded in an adequate manner. Thus, to improve the
performance evaluation as well as to attain success of the merit pay plan is it is necessary that the
organisational managers must follow and implement the ways and recommendations offered in
the paper.

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