Appraisal-Related Pay is merit pay system which links earnings of an individual or employee to his/her performance appraisal. In other words, it is money paid to someone relating to how well one works. This pay system is built on the premise that reward can bring right behavior and money is a powerful incentive to increase the efforts can employee can make on behalf of the organization.
A well-defined Appraisal-Related Pay system would have flowing elements:
• Performance objectives setting
• Communication of objectives and their understanding
• Performance consideration against objectives
• Evaluation and rating of performance during appraisal
• Linking of rating and determination of pay
• A separate procedure for appeals
The aim of linking appraisal to pay is basically to motivate employees to perform at their best. It shows distributive justice inside the organization and addresses the norm that employees should be rewarded as per their contributions. This system, if adequately developed, can potentially remove equity concerns among employees. However, this pay system also has some disadvantages like there could be disputes on how performance is measured and it is quite subjective to decide that whether employee has done enough to be rewarded or not. This system can encourage unhealthy rivalry among managers. Moreover, this method of paying can motivate individual efforts, but will have less impact on improving team work.
A good example to understand this concept could be a sales man, per se, car/motorcycle sales man. His salary could be dependent upon how many vehicles is he selling per month. At Organization level, this system is followed in companies like Infosys, Cognizant Technology solutions and many more. In these companies, a part of the salaries of the employees is fixed and rest is variable. That variable component is highly dependent upon the appraisal.