"Pay for Performance” or “merit pay” is a system of compensation where pay is linked to job performance and can be based on either individual or group performance. In Pay for Performance systems, performance standards are set and performance is measured against those standards to determine pay.
The system of compensation many people are accustomed to is “Job Based Pay.” Job Based Pay is a system of compensation where pay is linked to the job and reflects the skill, responsibilities, effort and conditions required by the job.
In public employment, most are accustomed to a “Classification System.” In a Classification System, a job evaluation or job analysis determines what grade you are in within your classification.
In the private sector, Pay for Performance systems are “additive” in nature. In other words, merit pay is added to job-based pay. For example, if certain quotas or profits are met, employees share in the profit.
Pay for Performance is used to motivate employees, improve performance, promote identifiable employer goals (e.g. increased production or profits), or to improve quality and customer satisfaction. Most importantly, Pay for Performance is used in the private sector to increase profits.
A Pay for Performance system assumes that standards can be fairly set for each job and that each individual’s performance can be fairly and accurately measured. In private sector, standards such as quotas, sales, and profits, are objective and easily measured. Typically, if the standard is met, the pay follows.
Pay for Performance in the public sector has serious fundamental flaws. In public sector employment, pay for performance systems are not additive in nature and are designed to take the place of job based pay. Before Pay for Performance can work, employees must be paid fair base rates; this is generally not the case in public employment.
Additionally, in the public sector, there is no way to create money; consequently, pay for performance systems lack adequate funding. Agencies receive a lump sum too small to accomplish the legitimate interests of the employer such as improving performance or motivating employees.
In the public sector, it is difficult to set objective performance standards for each job that fairly and accurately measure performance. Without objective performance standards, performance evaluations fall to subjective criteria and judgment of the supervisor. In fact, pay for performance can be counterproductive, leading to behavior detrimental to others in the department and poor morale.
North Dakota United does NOT support “Pay for Performance.”