A drawback is that conditions can s

A drawback is that conditions can shrink the available range of increases. During recent years, budgets for pay increases were about 2% to 4% of pay, so average performers could receive a 3% raise and top performers perhaps as much as 5%. The 2-percentage-point difference, after taxes and other deductions, would amount to only a few dollars per week on a salary of $40,000 per year. Over an entire career, the bigger increases for top performers can grow into a major change, but viewed on a year-by-year basis, they may not deliver much of an incentive to excel.10 As Figure 13.2 shows, the typical spread of pay raises across all employees is just a few percentage points. However, experts advise making pay increases far greater for top performers than for average employees—and not rewarding the poor performers with a raise at all.11 Imagine if the raises given to the bottom two categories in Figure 13.2 instead went toward 7% or greater raises for the one-quarter of employees who are high performers. This type of decision signals that excellence is rewarded. As the unemployment rate continues to fall, upward pressure on wages may increase the possible range for merit increases. If average pay rises by 4% or more, there are more dollars to distribute among high- and middle-performing employees. Another advantage of merit pay is that it provides a method for rewarding performance in all of the dimensions measured in the organization’s performance management system. If that system is appropriately designed to measure all the important job behaviors, then the merit pay is linked to the behaviors the organization desires. This link seems logical, although so far there is little research showing the effectiveness of merit pay.12