Removing performance appraisal and merit pay in the name of quality: an empirical study of employees' reactions

Abstract

Given the important and institutionalized roles of performance evaluations and merit pay plans in organizations, it is likely that employees would have strong reactions to the abrupt removal of established evaluation and merit pay systems prescribed by the implementation of Deming's quality management philosophy. This paper develops a model that tests employees' reactions to the removal of these programs on a sample of 123 nonmanagerial bank employees. Results indicate that the policy changes were positively received by employees. Replacing a traditional performance appraisal with a concerted performance feedback and coaching effort, and merit pay with a blanket pay increase enhanced employees' perceptions of pay fairness, pay satisfaction, and job satisfaction.