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The Allocation of Merit Pay in Academia: A Case Study
ArticleinEconomics Bulletin · January 2011
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Volume 31, Issue 2
The Allocation of Merit Pay in Academia: A Case Study
Finn Christensen
Towson University
James Manley
Towson University Louise Laurence
Towson University
Abstract
This paper investigates whether the widespread awarding of faculty merit pay at a large public university accurately
reflects productivity. We show that pairwise voting on a quality standard by a committee can in theory be consistent
with observed allocation patterns. However, the data indicate only nominal adherence to a quality standard.
Departments with more severe compression issues are more likely to award merit pay as a countermeasure and some
departments appear to be motivated by nonpecuniary incentives. Much of the variance in merit pay allocation remains
unexplained. These results suggest reform is needed to improve transparency in the merit system.
We thank Tim Sullivan and James Clements for providing us with needed data. Errors are our own.
Citation: Finn Christensen and James Manley and Louise Laurence, (2011) ”The Allocation of Merit Pay in Academia: A Case Study”,
Economics Bulletin, Vol. 31 no.2 pp. 1548–1562.
Submitted:Jan132011.Published: June 05, 2011.
Economics Bulletin, 2011, Vol. 31 no.2 pp. 1548-1562
1
1. Introduction
Merit pay in organizations is designed to induce high effort by rewarding
productivity, but in educational institutions often merit pay is awarded too broadly to be an
effective incentive. At the University of Washington annual salary increases were called
“merit pay” (Gravois 2007). In Florida in 1992 two-thirds of faculty members received merit
pay (Anderson 1992). At the large public university we study, the typical department
awarded the highest level of merit (“merit plus”) to two-thirds of its members (Table 1).
Why is merit pay awarded so generously in academia? Are recipients deserving?
Table 1: Merit plus Allocation by Tenure Status and Year
Award
Year
# faculty
in sample
Avg % Merit
plus – All faculty
Avg % Merit plus –
Tenured Faculty
Avg % Merit plus –
Untenured Professors
2007
492
67%
77%
64%
2008
519
68%
79%
59%
2009
563
68%
80%
58%
Both questions have important implications for the design and effectiveness of merit
pay on college campuses. If merit pay reflects productivity, an increase in standards may
elicit more effort from faculty. If merit pay fails to reflect productivity, faculty may be
shifting effort from education to simple politicking to attain greater merit pay (Adnett 2003).
Further, confused faculty may be frustrated by a perceived lack of clarity or consistency (cf.
Quimby, Ross and Sanford, 2006). Better alignment of merit and productivity increase a
merit system‟s effectiveness from the university‟s perspective.
A unique aspect of academia is that professors decide on merit pay for their
immediate colleagues. Since professors are the experts in their fields, no one else on campus
is fully able to evaluate their work. However, asking them to assess their own productivity
clearly represents a conflict of interest. Such conflicts are intolerable in most sectors; even
CEOs are often required to make a show of obtaining outside evaluation, though they often
exert de facto control of their salaries (Elhagrasey, Harrison, and Buchholz, 1999).
That said, academic merit pay is not a free-for-all. Departments must justify merit
decisions using a faculty member‟s scholarly activity, teaching performance, and service in
the prior academic year.
At some schools merit and retention raises may be substitutes or complements, but at
the university we investigate there are separate policies for merit and retention. Based on this
policy and for the sake of simplicity we assume these issues are independent.
Each fall, every department is assigned a pool of merit money to allocate among its
members. Merit money is allocated by a “merit committee” of tenured faculty members, who
decide whether each department member has earned “base merit” or “merit plus” designation
based on his or her activities during the preceding academic year (June – May). “Base merit”
carries one share of the department‟s total award money, while “merit plus” represents two
shares. According to written policy, these decisions should be made solely based on research,
teaching, service, and in some departments “collegiality.” Given a fixed pool of merit
money, if one person is awarded merit plus, the remaining department members receive less.
Thus, each professor desires a standard of merit just loose enough that he is deemed
meritorious. Any looser standard erodes the monetary and hedonic value of the designation.
Given this structure, our theoretical model shows that sincere voting on an objective
standard can result in a large share of the faculty receiving merit plus. With sincere pairwise
majority voting, any standard may be chosen depending on the order in which the merit
committee considers them (McKelvey 1976). Assuming that the committee proceeds through
the available standards from strictest to loosest, we show that the committee will award merit
plus to at least half its members. Further, use of a quality standard implies that the probability
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2
of getting merit plus should be increasing in and largely explained by observable output.
Finally, under a quality standard, untenured professors will be awarded merit plus less often
than tenured professors if and only if they are less productive.
We test these theoretical predictions with anonymous university-wide data containing
faculty rank, department, and merit status across three years. Additional anonymous data
within the university contains merit decisions and productivity measures.
The probability of merit does increase with productivity in the college-level data.
However, little of the variation in awards is explained by observable output. Moreover, the
way observable output influences decisions differs by tenure status. Untenured professors are
on average as productive as tenured faculty members on observable measures, yet are
awarded merit pay at significantly lower rates (see Table 1). Thus, the evidence indicates
only nominal adherence to a quality standard.
We identify two factors other than productivity which seem to influence decision-
making. First, we see “warm glow” awarding in some departments in which all or nearly all
members are awarded merit plus. There the hedonic value of deeming a colleague
meritorious exceeds the monetary cost of doing so. A similar possibility is that decision-
makers award merit plus to avoid backlash from unhappy colleagues (COHE 2004).
Second, we investigate whether merit is used to address compression (low salaries of
some senior faculty relative to the salaries offered to new hires). We find some support for
this hypothesis.
Given the issue‟s inherent complexity and its immediate importance for many
economists, surprisingly little has been written in the economics literature about merit pay at
universities. Much more attention has been devoted to the tenure system (e.g., McPherson
and Schapiro, 1999; Carmichael, 1988; Dnes and Garoupa, 2005). Like this paper, Euwals
and Ward (2005) and Tuckman, Gapinksi, and Hagemann (1977) investigate the relationship
between faculty remuneration and output. Both find that research output positively influences
a professor‟s salary. However, Euwals and Ward find that quality teaching is an important
determinant of salaries while Tuckman et al. find only a weak relationship. This paper differs
in two key respects. First, we have data on both annual merit decisions and productivity; the
others do not observe raises directly. Second, we identify annual changes in salary due to
merit evaluations rather than overall salary.
In the next section we review the literature, and in Section 3 present our theory of
merit allocation. Section 4 describes the data and evidence of warm glow awarding. Section 5
investigates the data more deeply and Section 6 offers suggestions for improving merit.
2. Literature Review
Some studies show that merit pay can motivate above average performers (Marsden
French and Kubo 2001) and that it can improve schools more effectively than upgrading
equipment or facilities (Lavy 2002). However, many analysts conclude that merit pay is
difficult to organize effectively in an educational setting. In a far-reaching review, Hanushek
(1986) finds that school expenditures are not linked to school performance, and often merit
pay has been tried but rarely persists. Burgess and Ratto (2003) note that early in their
careers, workers need to demonstrate that they are hard workers, so additional incentives are
redundant. Dixit (2002) notes that in education, many outcomes are unobservable and
measuring progress toward these outcomes is still harder. He concludes that “We should not
expect [education] to turn into a[n]… organization that is left free to devise its own best
procedures and judged by outcomes” (p. 721).
Indeed, such incentives often fail. Government workers facing incentive schemes tend
to “game” the system (Courty and Marschke 2003, Courty and Marschke 2004). In Kenya,
student achievement-based compensation failed to increase teachers‟ classroom attendance
(Glewwe, Ilias, and Kremer 2002). Worse, merit pay can disincentivize teamwork and detract
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Economics Bulletin, 2011, Vol. 31 no.2 pp. 1548-1562
from intrinsic motivation to work (Burgess et al. 2001, Belfield and Heywood 2008,
Hanshaw 2004). Further, merit pay skews incentives such that the appearance of yearly
results supersedes risk-taking or long-term investment (Foldesi 1996). The inability to
adequately measure performance can become frustrating and sap teachers‟ motivation
(Marsden French and Kubo 2001).
3. A Theory of Merit Allocation
At the university we study, each academic department forms a merit committee,
typically composed of the department‟s tenured faculty members, which must allocate a pool
of merit money π among all faculty members in the department. Each department member is
assigned either one merit point (base merit) or two merit points (merit plus). The value of a
merit point equals the total value of the merit pool divided by the total number of points
awarded. Thus, if a department has N members and n ≤ N members are awarded merit plus,
the value of a merit point is π/(N+n). Those receiving merit plus get a merit raise of
2π/(N+n) while those receiving base merit get a merit raise of π/(N+n).
Note that keeping one‟s merit level fixed, an individual prefers that fewer people
receive merit plus (MP). Moreover, one is always at least as well off receiving MP compared
to base merit (BM) regardless of how many others receive MP: 2π/(N+n)≥ π/(N+n’) for any
0≤n, n‟≤N, with equality iff n=N and n‟=0.
Written policy documents indicate that merit decisions should be made annually
solely on the basis of a person‟s research, teaching, service, and “collegiality.” Crucially,
there are separate policies for retention and compression. In practice merit pay could be a
way to address these other compensation issues, but this is not what written policy states.
