@arcadia - A lot of schools offer merit to be competitive with schools perhaps a notch above them on the food chain. They are trying to attract higher stats kids, who may have several offers from other schools and are trying to get them to commit with financial incentives. Some schools may not be need blind or meet 100% need, so they reserve some of the financial aid budget for merit.
The following is an an excerpt from an article about the Fordham faculty health care issue and presents the pov of a great many faculty members. To be taken with a grain of though for sure, because the faculty is arguing for more spending on faculty benefits, so is pointing out what they feel are misguided assets.