¶ … Value of Merit-Based Plans, Incentive-Based Plans, and Profit Sharing Plans Merit-based payment plans, incentive-based payment plans, and company profit sharing plans all can be classified as organizational attempts to foster employee loyalty, increase employee productivity, and make the company a more attractive place to work. Their aim is to increase the motivation of employees to do quality work, above and beyond the expected minimum of the 'job description.' However, the plans operate on slightly different psychological principles and thus aim for slightly different motivational results.

Merit-based plans attempt to allocate pay to employees based on the employee's assessed merit to the company. If employees show the level of merit expected according to the plan, they are rewarded. By setting a certain concrete standard for employee performance, usually determined by human resource staff and assessed on a case-by-case basis through the use of regular performance reviews, employee quality is continually monitored. Additional pay, bonuses, or benefits are given based upon such assessed merit during these reviews, according to pre-set standards. The advantage of merit-based plans are that...

Performance reviews can be overly reliant upon subjective judgments of what constitutes merit. On the other hand, often merit is so broadly defined, the term is rendered meaningless, and so" merit pay plans have lost their 'merit' and become entitlement plans," at some companies wherein all employees are given salary increases. ("Variable Payment Plans: People Management, The Vault, 2005)
Incentive-based plans attempt to curtail such potentially frustrating subjectivity in employee assessments and negative competitiveness by giving employees specific goals they must work towards, rather than simply elusively promising extra pay based upon 'merit.' However, human resources must have a clear idea of what incentives are appropriate to award for achieving company goals. There is an advantage and a disadvantages, too, as when incentive-based…