How does merit pay differ from a bonus? This is an important question that all employers should ask themselves and be educated on. Although both terms are often used interchangeably when discussing employee recognition, there are significant differences between the two that must be made clear.
Merit pay and a bonus are generally awarded under specific circumstances and have major influence on factors such as employee satisfaction, engagement and retention.
Both are a type of reward system used to acknowledge high-performance and encourage employees to strive for their highest professional potential. They must be understood independently so you can make the most informed decision about implementing either one.
So how do these types of employee rewards differ? This article will not only answer this question, but will provide the benefits of each and the potential disadvantages too.
Merit pay can be simply understood as an increase in salary that’s dependent on an individual’s performance in a fixed review period. These increases are usually extended as a small percentage added to the employee’s salary and depend on each person’s level of accomplishment.
Top performing employees are awarded a higher rate of merit pay than the team member’s that met average expectations, and those with subpar performance do not receive an increase.
Merit pay is perfect for annually rewarding your highest performing team members as they will receive a wage increase that carries from year to year. This creates a new incentive opportunity, that’s not connected to tenure or promotional circumstances, but allows the employee to work towards reaching new heights within the company.
To summarize the concept of merit pay, it’s a reward system that’s based solely on employee performance and is extended per individual instead of on a team basis.
There are commonly fixed periods of time, established by the company, for the employee to earn the incentive. They can then be appraised against those benchmarks at the end of the fixed period and then rewarded for their individual performance.
Related: What’s The Difference Between Merit Pay Vs Incentive Pay?
A bonus differs from merit pay mainly in that it’s not only individual based and can be extended to entire teams, and it does not have to be linked to the employee’s annual salary (bonus reward plans can be extended daily, annually, or on a project-to-project basis). Simply put, a bonus is a one-time incentive to motivate employees on a specific project or goal.
Once employees are deemed eligible for a bonus, they can receive a detailed agreement that outlines the goals and targets that must be met to qualify for the reward. Unlike merit pay, this type of incentive can be offered to individuals or it can be geared towards entire teams that collaborate regularly.
A great example of a bonus would be giving your team a one-time monetary reward for exceeding their quarterly sales target.
Now that you’re familiar with merit pay and bonuses and can differentiate between the two, we hope it becomes an easier process for you to select the incentive program that works best for your company.
At the end of the day, a successful employee reward system recognizes team members for their continuous efforts and is an excellent way to drive engagement and increase retention in the workplace. Your people will appreciate the added attention you put in to extend recognition to them!