Merit pay's fundamental advantage is that it incentivizes an employee's good performance. The merit pay system is the ultimate reward for an employee's work. It creates the motivation for the employee to work harder and be more effective when they know that there is a tangible benefit to doing so. In this light, the focus on quality becomes an advantage to merit pay. Another advantage to merit pay is that the metric for defining it can always be adaptable. If managers deem a target needed to be reached, using merit pay as a way for employees to achieve that target is an effective way of ensuring that it becomes the primary focus for the employee. Finally, along with the choosing of relevant criteria for success, the substantiation of strong employees becomes relevant in a merit pay system. Merit pay encourages strong employees to remain and ends up ensuring their relevant to the organization. Employees who are not as strong and have not shown growth recognize their lack of accomplishment under the merit pay system and act accordingly. In a business model where efficiency and output are essential for success, merit pay becomes a compensation model that can reflect such a reality.
Some of the negatives of merit pay concern the fact that it helps to define an employee's worth in an external manner. Merit pay is the ultimate recognition of the fruits of one's labor. In some cases, work done might be more intrinsic rather than extrinsic. For example, merit pay in the teaching field is a bit more nuanced than in a strict output arena like the bonus in the business world. In teaching, there is no exact "moment" in which a child "gets" a concept or it is difficult to put a price tag on the emotional nurturing a teacher does to get a child to a particular point. The merit pay model is extrinsic, which might not be appropriate to fields that are more intrinsic in nature. Another challenge in the merit pay system is that it can breed unhealthy focus on ends that are not the same focus points for an organization. An employee can become so subsumed with the results of a merit pay system that it causes them to worry about it more than the job or organization's focus at hand. There are so many other elements that define the success of the company or organization that these can be lost in a merit pay system in which the employee is looking only at their compensation. Additionally, merit pay does foster unhealthy competition between employees. Whereas the lens of improvement and self- reflection should be driven inwards such as asking questions like "How can I improve," merit pay makes everything external. Questions inevitably drift towards, "How come _______ received more than me? I work harder than _____ does?" Finally, there is a more metaphysical question in play with the merit pay system. Should money or economic compensation be the only metric or qualifier of success? It certainly seems that way in a merit pay system. How can organizations preach the idea to their workers that they should follow their voice, activate their passions, and work towards internal fulfillment is external compensation is weighed so heavily, as it is in a merit pay system. This might be a metaphysical question, but one that is present in a merit pay system.