As a passenger I don't want a merit-based system. I want a "standard" pilot, with the standard being excellent. I don't want Eddie Haskell in the left seat simply because he can kiss ass better than the guy in the right seat.
As a manager/owner, I'd like the same thing, but with some form of merit-based upgrade. I think a seniority based system would need to be the base - nobody can upgrade until they have the seniority. Then, when that person's number comes up, perhaps look at a set of metrics.
For example:
1) Performance on training events: how many re-trainings has this guy had?
2) How many complaints has this guy had from other crew members, and did they have merit?
And you can maybe come up with other criteria - I have little knowledge of other areas of measurement that would be relevent. The idea would be to pick some kind of standard that all the pilots are adhering to anyway, and start to use that for a basis of upgrade. This eliminates the ass-kissing portion of the merit based upgrade but places a standard on performance against your peer group, performance in interacting with your co-workers, and couples that with the seniority system. Perhaps some kind of system like that would have kept Renslow out of the left seat of 3407? I'm not sure of the specifics of what measurements you'd use, I only left those as an example - but I wouldn't want any metrics that had to do with kissing up to management.
TWA in the fifties I believe would make all FO's pass Captain upgrade at 5 years. That didn't necessarily mean they could hold captain, but they had to pass that upgrade training or be fired - TWA didn't want anyone that couldn't upgrade. Some kind of system like that, with expanded criteria maybe. At some point they quit doing that five-year thing, but their upgrade used to last six-months I've heard, with numerous opportunities and tests within that six-months to be fired. I believe any score lower than 80% on a written test was grounds for dismissal as well as performance in the sims/flight portion of the upgrade. That would pretty much accomplish the same thing as a merit based upgrade I would think.