This document discusses managing human capital through merit pay plans. It provides background on performance appraisal and compensation programs before examining arguments for and against merit pay. The document outlines examples of merit pay plans in practice and their successes and failures. Guidelines are presented for establishing successful merit pay plans, recognizing that individual and organizational factors must be considered. While merit pay can motivate performance, proper implementation and performance evaluation are necessary.

1. Managing Human Capital
Table of Contents Page no.
1. Executive Summary 1
2. Introduction 2
3. Reward structure 3
4. Performance appraisal 4
5. Compensation and Benefits 4
6. The Law and Compensation 5
7. Merit pay plan 6
8. Merit pay plans in practice 7
9. Discussion and debate 7
10. Examples of Merit Pay 7
11. Successes and Failures of Merit Pay Plans 9
12. Personal Point of View 10
13. Guidelines for Merit Pay Plans 10
14. Conclusion 11
15. References 12
16. Bibliography 13

2. Managing Human Capital
Executive Summary
Human capital is the only living breathing capital in an organization that has a thought of its
own. Managing these human capitals or employee or staff as commonly referred is a great
challenge. Recruiting, motivating, compensating all the activities of Human Resource
Management (HRM) has significant impact on how the employee responds to the policies
introduced by the organization.
The purpose of this report was to discuss and debate with supplementary study of the factors
influencing and contradicting on the part of any management to award employees with merit
issues. Due to lack of data regarding the merit pay plan and its success all recommendations
were made based on assumptions found from critics who argued in support and against the merit
pay plan. Further assessments derived from various studies on success and failure rate and
example of organizations applying merit pay plan in practice.
Studies suggest that it is hard to say whether awarding employees on merit issue will positively
reinforce and motivate towards optimum output as there are certain factors to be considered and
clarified before initiating such concept in to practice. First of all, there is no standard way to
evaluate merit. Moreover the evaluations made by management may differ with the employee’s
perception. Individualistic mentality may roam the cubicles of each employee as they become
self-cantered about proving they are the best. Then again fixing and regulating the pay increase
in proper manner is not as easy at it sounds.
Taking all these in account still merit pay plan has proven to be successful for many esteemed
and renowned organizations. A simple Guideline acknowledgement helped such organizations to
initiate merit pay plans and rip the seeds of success. In this report some guidelines are given in
support of initiating merit pay plans for employees on any part of management.
The report was limited to time constraints and access of data. My apologies for any mistakes
arising from lack of depth study and sheer inexperience, despite all the efforts made to make it
authentic as possible.

3. Managing Human Capital
Introduction
Human capital is the total value of human resources to the organization. Also sometimes referred
to as intellectual capital, it is composed of the people in the organization and what capabilities
they have and can utilize in their jobs.
Managing human capital or commonly known as Human Resource Management(HRM) is a
formal management system concerned with staffing the organization, training and development,
maintaining high performance, total rewards, employee relations, labor-management
environments and so beyond to ensure the effective and efficient use of human talent to
accomplish the organizational goals. In a seed wrap the key words representing HRM are:
• Achieving success through people
• Getting the right people with the right skills for the right job
• Enhancing motivation and commitment through performance appraisal and
reinforcements
• Creating the perfect productive and harmonious work environment.
In order to enhance the efficiency and effectiveness of the efforts of even the most skilled and
capable employees HRM must ensure proper motivation is provided. It must be made sure that
desired actions are positively reinforced through rewards and wrong ones are punished. But it’s
hard to select the best method of reward as the employees wants and desires differ from one
another. For an employer to decide on a perfect reward plan to motivate all the employees as
whole is a great challenge. Performance appraisal is one of the ways to evaluate an employee’s
work.
Every employee expects a paycheck or compensation in return for the service or labor s/he
spends. Unless the effort is rewarded through proper motivating compensation the performance

4. Managing Human Capital
tend to decrease. The most obvious reward employees receive from work is pay. Rewards may
also be in the form of promotions, desirable work, assignments, and a host of other recognition.
Reward structure
Rewards are positive feedback and provide reinforcement, or encouragement, for the employee
to work harder in the future. The three most typical dichotomies are: intrinsic versus extrinsic
rewards, financial versus nonfinancial rewards, and performance-based versus membership-
based rewards. A structure of rewards is shown in a chart to simplify and exhibit the three most
typical dichotomies for a better understanding of the features and relative differences.

5. Managing Human Capital
(A.Decenzo & P. Robbins (2008), Fundamentals of Human Resource Management, Singapore:
John Wiley & sons (Asia) pte ltd.)
Performance appraisal
Performance appraisal is the single most important management tool in a sophisticated well-
managed organization. No other management process has as much influence over individuals’
careers and work lives. Properly utilized, performance appraisal is the most powerful instrument
that organizations have to mobilize the energy of every employee of the enterprise toward the
achievement of strategic goals. Used well, performance appraisal can focus every person’s

6. Managing Human Capital
attention on the company’s mission, vision, and values. But used poorly, the procedure quickly
becomes the butt of jokes and the target of Dilbert lampoons. [Dick Grote (2002),.The
Performance Appraisal Question and Answer Book: A Survival Guide for Managers, New York:
AMACOM]
Compensation and Benefits
Once employee performance has been measured, it must be linked to compensation programs.
Unlike traditional compensation programs that provide “cost-of-living” or other across-the-board
pay increases, the greatest challenge is to develop and implement more performance-oriented
reward programs. Some of the most common compensation programs are-
• ESOP- Employee Share Ownership Plan is an equity based, deferred and defined
compensation/ benefit plan that allows employees become owners of shares of the
company they work for.
• Gain sharing- a team approach where all the employees of a site, operation or project
receive some financial gain through higher levels of performance or performance
improvement. It is a management system for organizations to motivate employees
through rewards.
• Profit Sharing- an incentive based compensation plan that awards eligible employees a
percentage of company’s pre-tax profits, weighted by the employees base salary an given
on an annual basis.
• Scanlon Plan- A team incentive program focused on the cooperation between
management and employees through sharing problems, goals, and ideas on sharing cost
savings and productivity gains.
• Annual Bonus- A distribution of profit as declared bonus given by the company on an
annual percentage rate which is added to the unit price of the fund on a daily basis. The
rate may change on an annual basis or even more frequently.

7. Managing Human Capital
• Performance based pay plans-The label pay for performance covers a broad spectrum
of compensation systems that can be clustered under two general categories: merit pay
plans and variable pay plans, which include both individual and group incentive plans.
The Law and Compensation
Over the past thirty years numerous laws and regulations have been enacted at national, state,
and local levels. Every year these regulations have been expanded due to regulatory actions and
judicial decisions. As a result, in case of compensating an employee there are certain legal
considerations and laws that are mandated through government legislation that are to be strictly
maintained
Fair Labor Standards Act of 1938 (FLSA)
• Equal Pay Act (EPA)
Passed in 1963, the Equal Pay Act amended the FLSA, requiring that males and females
performing the same work be paid the same wages.
• Civil Rights Act of 1964
• Employee Retirement Income Security Act (ERISA)
• Internal Revenue Code (IRC)
Merit pay plan
Merit pay plan is one of the performance-based reward programmes. Although often used as a
substitute to cost-of-living raises still it has its own unique turfs and criticisms. It is one popular
and almost universally most, widely used incentive system.

8. Managing Human Capital
An incentive plan resulting in increase in pay annually or periodically; implemented on an
organizational wide basis such plans grants employees equal opportunity considerations,
regardless of funding source. The merit increase program can be implemented when funds are
designated for that purpose by the organization's administration, dependent upon the availability
of funds and other constraints. .
Arguments In Support of Merit pay Arguments Against Merit pay
• Allows the employer to differentiate
pay given to high performers
• No proper way to measure merit
• Allows a differentiation between
individual and company performance
• The pay is subjective
• Allows the employer to satisfactorily
reward an employee for accomplishing
a task that might not be repeated (such
as implementation of new systems)
Merit pay plans in practice
The most issue regarding merit pay is the merit pay plan for teachers initiated by Barak Obama
the president of United States. More or less discussions and debate took place about how merit
could be administered. A gist of all that is given here
Discussion and debate

9. Managing Human Capital
The new emphasis on performance appraisal and merit pay calls for a thorough examination of
their effectiveness. Pay for Performance Is the best resource to date on the issues of whether
these concepts work and how they can be applied most effectively in the workplace.
Propositions had been put to the test at universities, one group modifying the way merit pays are
allocated and the other constructing a parley for an administration proposal to adjust any salary
raises that aren't based on merit or performance issues.
Issues are quite complex. Persistently, they find administrations intent on making strategic use of
merit pay on basic salary, often the issue of employee conflict as they don't partially disagree
with the administration's priorities. But such disputes can also crater staff members against each
other, high-performing departments which are higher-paid fighting against those with smaller
budgets, higher-achieving employees against "dead wood," rapidly expanding or on growing
disciplines versus those that are stagnating or declining. Besides, a common agreement about
what exactly "merit" or "performance," or "incentive pay" plans entail is still a concept vaguely
defined.( http://www.mackinac.org/9801)
Examples of Merit Pay
1. In Maryland. Towson University, tensions bubbled the surface as faculty, over the past
two years, hashed out an alternative plan to the current method of doling out merit raises
based at the department level. But for now, at least, faculty members and the
administration seem to have come to a negotiation that they can more or less live with, at
least for a two-year trial period.( http://www.mackinac.org/9801)
2. Meanwhile at Temple University, the administration is attempting to switch entirely to
"pay per performance" raises that would not take cost-of-living increases or other factors
into account -- a change the faculty union vigorously opposes.(
http://www.mackinac.org/9801)
Historically, resistance to merit pay resulted in few highly criticized trial programs.
However, in recent, many states around the nation, in districts large and small; rural,
urban and suburban, have begun implementing awards on merit issues. Even if only a
few scrupulous studies of merit-pay programs have been conducted, research has begun

10. Managing Human Capital
to suggest that well-designed merit pay plans can lead to better student achievement.(
http://www.mackinac.org/9801)
3. The Achievement Challenge Pilot Project, instituted in the Little Rock public schools
from 2004-2007, was a merit-pay plan tying bonuses for school personnel solely to
students progress on standardized tests. (http://www.mackinac.org/9801)
4. An evaluation program led by Marcus Winters and Gary Ritter of the University of
Arkansas mentioned that the students of ACPP schools had somewhat large and
statistically significant gains in math and language arts compared to students in
nonparticipating district schools. Nevertheless, critics of merit pay suggest teachers may
begin to compete, rather than collaborate, and avoid working with traditionally low-
performing students, the ACPP evaluation found no evidence of these problems.(
http://www.mackinac.org/9801)
5. Additional programs, such as the Teacher Advancement Program, merge merit pay with
other rewards. TAP was initiated by the Milken Family Foundation, and the program is
currently being implemented in over 180 schools in 13 states nationwide.()
http://www.mackinac.org/9801)
6. Another prominent plan containing elements of merit pay is "ProComp,the Denver
Professional Compensation System. Akin to Chicago’s REAL, ProComp was adopted
with support from the local teachers union such as the Denver Classroom Teachers
Association. Though the plan started as a pilot project in 1999 and then expanded to
allow all Denver Public Schools teachers to participate in 200 Denver voters also
approved a $25million tax initiative to help finance ProComp in November 2005.
(http://www.mackinac.org/9801)
Successes and Failures of Merit Pay Plans

11. Managing Human Capital
As merit pay has grown more than popular, it is becoming apparent that these plans have both
succeeded and failed. One study of employers found that despite the fact that 61% of the
companies have variable pay plans; almost half of them did not achieve their performance targets
for the year. But to avoid negative employee reactions, many of those companies paid out 85%
of the incentives anyway. The good news from the study is that over half of the merit pay plans
achieved their performance objectives. Executive-focused merit pay plans tend to be viewed as
more successful than those used with lower-level, non management employees.
The responses of employees are crucial to how merit pay plans carry out. It is interesting that in a
study of over 2,000 workers from a variety of companies, most respondents said they want
performance rewards included in their base pay, rather than as one-time payments. Also, the
employees strongly preferred individual rewards over team or organization incentives. These
studies and others highlight the fact that neither of the polar extremes—the view that incentives
do not work versus the view that incentives are a panacea—appears to be the case. Also, the
enthusiasm that many employers and managers have for merit pay plans is not matched by many
workers. The key to success seems to be to combine incentives with employee participation in
the process.
In summary, it appears that merit pay plans are successful under certain circumstances. A
number of factors affect the success of merit pay plans. The next section discusses the guidelines
for establishing successful merit pay plans.
Personal Point of View
It’s hard to say the impact and the response of any part of management to award employees with
merit issues. Although merit pay plan has certainly proven to be successful in many
organizations but to maintain a suitable condition for merit pay plans to function orderly depends
on the management itself. There is no confusion that merit pay plan was introduced to encourage
employees to show best performance and merits. The one who performs or shows most merit
gets an pay increase. I would it is a good idea. But before initiating such concept the employees
and management should well educated about the term performance based pay and variable pay.

12. Managing Human Capital
Like everything it also has its ups and downs. Certain things are to be considered while initiating
merit pay plans. One of the biggest pitfalls is that there is no standard measuring tool of merit.
Usually supervisors are the ones who do the evaluation. So biasness or inappropriate evaluation
sometimes may lead to employee-manager or employee-employee conflict. The evaluation done
by the organization may seem unfair to the employee.
Guidelines for Merit Pay Plans
Providing merit pay through incentive systems can be complex and can take many forms.
However, certain general guidelines are useful in establishing and maintaining successful merit
pay systems.
o Recognize organizational culture and resources
o Make merit pay plans understandable
o Keep incentive plans current
o Link the merit pay to desired performance
o Recognize individual differences
o Identify merit pay separately from base pay
Conclusion
The evidence on the effects of pay for performance, pieced together from research, theory,
clinical studies, and surveys of practice, suggests that, in certain circumstances, variable pay
plans produce positive effects on individual job performance. The evidence is insufficient,

13. Managing Human Capital
however, to determine conclusively whether merit pay can enhance individual performance or to
allow making comparative statements about merit and variable pay plans.
On the basis of analogy from studies and theories on variable pay plans, I would conclude that
merit pay can have positive effects on individual as well as organizational job performance. But
all these effects can be attenuated by the facts that, merit plans, pay increases are not always
clearly linked to employee performance, performance evaluation agreement exists, and increases
are not always viewed as wise decision. Nonetheless, it is believable that the direction of effects
is toward enhanced performance.
References
Book

14. Managing Human Capital
1. A. Decenzo & P. Robbins (2008), Fundamentals of Human Resource
Management, Singapore: John Wiley & sons (Asia) pte ltd.
2. Dick Grote (2002),.The Performance Appraisal Question and Answer Book: A
Survival Guide for Managers, New York: AMACOM
3. John McManus, Leadership: Project and Human Capital Management,
Burlington: Butterworth-Heinemann
4. Noe, Human Resource Management, Delhi: Darling Kindersley (India) pvt.
Ltd.
Internet
1. Examples of Merit Pay
http://www.mackinac.org/9801
2. Pay for Performance: Evaluating Performance Appraisal and Merit
Pay (1991)
http://www.nap.edu/openbook.php?isbn=0309044278&page=77
3. Debate: Merit pay for teachers
http://debatepedia.idebate.org/en/index.php/Debate:_Merit_pay_for_te
achers

15. Managing Human Capital
Bibliography
Book
1. A.Decenzo & P. Robbins (2008), Fundamentals of Human Resource
Management,8th
edition, Singapore: John Wiley & sons (Asia) pte ltd., p-275
2. Dick Grote (2002),.The Performance Appraisal Question and Answer Book: A
Survival Guide for Managers, New York: AMACOM,p-1
Internet
1. Examples of Merit Pay
http://www.mackinac.org/9801
2. Pay for Performance: Evaluating Performance Appraisal and Merit
Pay (1991)
http://www.nap.edu/openbook.php?isbn=0309044278&page=77
3. Debate: Merit pay for teachers
http://debatepedia.idebate.org/en/index.php/Debate:_Merit_pay_for_te
achers