Trend towards merit money growing fast: Study reports widespread demotivation as more employers opt for 'earned' increases

OVER THE PAST five years, pay systems that link salaries to performance have spread rapidly in private industry and more recently they have invaded the public sector.

In industry, it has been a phenomena associated with the decline in collective bargaining and the influence of unions; in the public services it has resulted from the Government's determination to break the link between salary increases and inflation.

The introduction of merit pay has been greeted nearly everywhere with deep suspicion, partly because it can be very difficult to measure performance.

There is little evidence that the systems work. Merit pay does not seem to increase motivation or produce higher productivity, according to research. In some organisations, such as the Inland Revenue, morale has plummeted as a consequence and internal papers say that it may be seen as a substitute for good management.

The Institute of Manpower Studies recently surveyed 1,000 employees in a building society, a retail food company and a county council.

It found that performance- related pay did not even motivate those with high performance ratings - and may even have had a demotivating effect. There was little evidence to suggest that it helped retain the best staff and no evidence that poor performers 'took the hint' and left the organisation. Employees were also found to be 'negative or neutral' when assessing its impact on organisational culture.

The study concluded that performance-related pay often demotivated the majority of 'average' performers and did little to enhance the motivation of the top 5 per cent, who it argues, would work well in any case.

The barrage of attacks on performance pay is, however, only matched by the growing number of organisations using it. The CBI recently made a point of endorsing the approach as the way forward.

In the 1992-93 pay round, the proportion of pay settlements monitored by the research group Industrial Relations Services, which involved pay rises based wholly or partly on individual merit, increased from 14.5 per cent to 20 per cent. The number of employees covered by such systems could now be approaching 5 million, one- fifth of the British workforce. About two-thirds of British organisations use the method for at least some of their personnel.

In finance and information technology, merit-based pay has become the norm, according to IRS. In the chemical industry, engineering and the public services - especially local authorities and and NHS Trusts - it is increasingly common among managers and white-collar staff.

Alistair Hatchett, of Incomes Data Services, argues that the problems have been exacerbated in recent years by low inflation.

'When a manager says to an individual: 'You've done well, here's 2 per cent', it's not calculated to boost morale,' he said.

Some critics believe the whole idea is fundamentally flawed, others that it is a sensible approach which has been badly implemented.

At BT, Britain's largest private sector employer, the Society of Telecom Executives (STE) reluctantly helped the company to draw up a system covering 26,000 middle and junior managers which the company has now abandoned.

A spokeswoman for the company insisted that the system was based on objective criteria and there were built-in safeguards to prevent unfairness. It had been suspended because the staff concerned were 'overpaid'.

The union last week completed a nationwide campaign against the imposition of a performance-related award this year under which only the top 10 per cent got a 'consolidated increase'. A further 75 per cent got an average one-off lump sum of pounds 800; 15 per cent got nothing.