Merit pay is a type of base salary administration system that suggests salary increases are based on a combination of an employee’s job performance and the position of his/her salary relative to the market. Most merit pay programs use a guide chart to help managers determine appropriate pay levels.

Merit pay, also known as reward management, is a form of incentive pay compensation. It is a form of employee compensation that has been growing as companies have found that in terms of motivating the workforce to become concerned with the success of the company, this system works well for giving the employee a personal stake in seeing that their efforts result in increased productivity and success for the organization as a whole. Altough other systems of incentive based pay such as gainsharing have gained popularity in corporate management strategies, merit pay continues to be a leading method for encouraging better profit margins.