The decision to base employee compensation on performance and seniority is an important factor to consider. Should all employees within the same classification receive the same pay? Or should employees with better performance or more seniority be paid a higher figure? The degree to which a company places emphasis on performance and/or seniority is an important policy decision. This will have a direct effect on employee attitudes and work behaviors, and therefore on the company's overall efficiency and equity.

Seniority Based: Longevity or seniority based increases tie pay raises directly to a preset progression based on time served with a company. It is assumed, in this theory, that the longer an individual is on the job, the more efficient or knowledgeable the employee becomes, thus leading to the additional assumption that overall job performance improves.

Performance Appraisal: In order for an organization to meet its business objectives, it must develop its employees with the skills necessary to improve performance in a dynamic business environment. Each individual needs to understand the company's view of their performance and development potential so that they can determine if their career path is consistent with company objectives.

Merit Guidelines: The issue involved in merit pay is employee perception. Do your employees view their pay increases as a reward for performance? Or do they expect an annual increase? Organizations frequently grant increases that have little motivational impact. Many times these are tied to budgetary items or the individual employee's position within a particular pay range. While this type of pay system is easy to administer, the difference between a poor performer and the top performer is usually not significant to motivate and recognize employees performance.