Merit pay in the public sector: bright promise or false hope

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Virginia Tech


Merit pay refers to the awarding of differential amounts of financial rewards to deserving employees based on their individual performances as measured by Performance appraisal and Rating. The idea is that such a practice would act as a spur to all employees -- both deserving and undeserving-- to improve their productivity to earn the extra pay. The systemic effect would be enhanced organizational productivity and effectiveness. Although it has fallen in and out of favor over the years, as its long history in the public sector shows, interest in the concept endures. So has the controversy surrounding its efficacy or the lack thereof.

This dissertation is an attempt to further our understanding of the potential of merit pay in the public sector. To this end, it makes a critical assessment of the efficacy or the lack thereof of merit pay programs in the public sector. This has been done by integrating the findings of thirty-six empirical studies that examined such programs. Twenty-nine of these studies elicited from employees their perceptions affected of how merit pay in their organizations has employee motivation, productivity, and organizational effectiveness. The remaining seven represent authors' (non-respondent) conclusions regarding the effect of merit pay on the above variables in the organizations they examined.

Taking all in all, the findings of this study show that merit pay has not significantly enhanced employee motivation, productivity, or organizational effectiveness. In addition, virtually all of the shortcomings and organizational behavioral problems identified in the literature with regard to the implementation of merit pay were found to have plagued the merit pay programs examined in these empirical studies. These problems seem to be ubiquitous and endemic. However, the goal-setting aspect of the merit pay process was found to have led to improvement in employee performance.

Two main recommendations are made. First, organizations should use goal-setting. It can yield beneficial results without the headaches of merit pay. Second, and more desirably, efforts at enduring motivation and productivity improvement should be directed toward promoting teamwork in the workplace and creating a culture that fosters commitment to organizational purposes and cooperation among persons and units within the organization.