Merit pay refers to a corporate system for employee compensation that focuses on individual performance in order to determine pay levels and compensation.
Generally, pay based on employee merit and performance is opposed to a system based on tenure with the company. Companies that use tenure based compensation reward employees based on their time with the company, combined of course with their specific pay-grade level based on Job Title and function.
Most employers use a combination of merit pay and tenure based pay, which is then adjusted for market conditions and hiring demand. Merit pay can take the form of special bonuses, structured programs based on performance against objectives, or discretionary awards and recognition based on management feedback. In general, merit based compensation packages should be very specifically quantified and structured prior to the employee completing the requirements to receive the compensation. A well-structured program is fact-based and quantitative, which is important for employee relations when employees of similar tenure and job title receive variable pay and compensation.