Summary. A merit bonus can be defined as an incentive offered on an institutional-wide basis that gives all employees the ability to be considered for extra pay in the form of a bonus, increase, or promotion based on work performance.
When working in an organization, many leadership teams set company-wide goals that employees are expected to reach. Though your organization may have motivated teams that are eager to show results, providing a merit bonus is a great way to further incentivize your teams to reach specific goals.
A merit bonus can refer to various types of compensation but is always based on an employee’s performance. Merit bonuses can also be offered to teams if they hit a specific goal or to executives who reach particular organizational objectives. This type of bonus can also be referred to as ‘pay-for-performance.’
Key Takeaways:
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A merit bonus can take the form of an increase in salary, a promotion, or a one-time bonus based on an individual employee’s performance.
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A merit bonus is most popular in sales positions as it incentivizes salespeople to work towards specific performance-based goals.
What Is a Merit Bonus?
A merit bonus is simply a financial incentive offered to employees based on their performance as an individual or a team. Companies will oftentimes set aside a budget for merit pay. After a specific amount of time, leadership teams will revisit the budget and determine how best to distribute it as a merit bonus to teams who have achieved specific goals.
An important consideration when developing a merit bonus plan is to clearly define what requirements employees must meet to qualify for this type of bonus. A well-planned program can set you apart from the competition and ensure your employees do not feel frustrated by their ability to gain this additional compensation.
How to Implement Merit Bonuses
First and foremost, meet with different departments to discuss and develop merit bonus policies. Once you’ve defined employee performance that qualifies for this kind of pay, agree on a compensation plan and whether it should be based on individual performance or group performance.
Once you’ve adequately defined these bonuses, be sure you communicate the merit pay system clearly to all employees. Consider training your managers, supervisors, or team leaders on how to ensure all employees understand the program and are able to answer any questions, if necessary.
Advantages of a Merit Bonus
Merit bonuses can positively impact your team and overall company culture in a variety of different ways. Some advantages of implementing merit bonuses at your company can include the following.
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Rewarding high performers. If you have a team where there are a few individuals who outperform their colleagues, merit bonuses are a great way to show how much you appreciate their hard work.
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Celebrate individual achievements. Oftentimes companies only celebrate the accomplishment of company goals. Merit bonuses allow employers the opportunity to celebrate individual achievements or individual contributions to achieve a company goal.
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Employee morale. Merit bonuses can greatly improve employee morale and even breed a healthy competitive culture between team members. It also demonstrates that the company is happy to pay employees what they are worth and greatly reward them for their achievements. This can also reduce employee turnover.
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Retain superior performers. Because merit bonuses reward excellent performance, it’s a great way to ensure you draw and retain superior performers in your company. Merit bonuses reward skill and effort with financial compensation or opportunities for advancement in the workplace.
Disadvantages of a Merit Bonus
Like most things, merit bonuses can have both a positive and negative impact on your organization in some cases. Choosing merit bonuses as an incentive must be right for your business, your culture, and your employees. Here are some disadvantages to consider before implementing a merit bonus program.
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Subjective pay. The decision of financial compensation is often left up to team leaders or managers and can be subjective. Depending on your employees, there may be inconsistencies between what is offered and what they may think is fair. The judgment made for who receives pay and why can also be subjective.
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Employee relationship tension. Merit bonuses can sometimes breed a competitive culture, so you must make sure this type of program is implemented with the right teams and people. Some employees can get jealous or divisive when only some on their teams are receiving bonuses.
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Lack of communication. It’s incredibly important to ensure merit bonus programs are communicated effectively so all employees understand what they can do to earn it. When there is poor communication, employees may not understand how they can earn these bonuses, leading to frustration.
Merit Bonus FAQ
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How much do merit bonuses pay?
Merit bonuses are often calculated as a percentage of an employee’s salary. The amount provided for the bonus or increase of percentage in salary must be determined by the leadership team and is dependent on the company’s overall budget for merit pay.
Depending on performance, there may also be a sliding scale of percentages awarded to employees. This can be dependent on any metric team leadership or management deems significant enough to award a bonus for.
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What’s the difference between merit bonus and merit pay?
Though these two terms are often used interchangeably, merit bonus refers to a one-time bonus payment, while merit pay refers to a payment increase added to an employee’s current base pay.
The term merit indicates that a bonus or pay increase is always available to employees, no matter the time of year. This can sometimes be confused with incentive bonuses or pay, which means that employees are eligible for a bonus for only a limited period of time.
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Can employees ask for a merit bonus?
Although not always common, yes, employees have the ability to ask for a merit bonus. This is typically considered when an employee is working on a specific project and has the ability to provide statistics and figures about the outcome of the project and how it impacts stakeholders.
Merit bonuses should only be considered under the right circumstances and with the right team of people to do so. If the project relies on reaching specific goals, especially financial ones, a merit bonus is a great consideration to make for your employees.
Merit bonuses can positively impact your team and environment, but there are a number of considerations to make before implementing this type of program in your business. Be sure you can effectively communicate your goals and criteria for merit bonus considerations and have a strong structure in place you and your employees can refer back to.
References
- Employee Retention
- Guide to Employee Turnover
- Retention Bonuses
- How to Conduct a Stay Interview
- Retaining Employees After a Merger
- How to Destroy Your Employer Brand
- How to Reduce Attrition
- How to Prevent Turnover
- How Bad Management Ruins Retention
- How To Cut Costs Without Cutting Staff
- How Managers Can Minimize Employee Turnover
- How Bad HR Can Destroy Your Company
- Effective Employee Retention Strategies
- Employee Retention Beyond The Honeymoon Phase
- Employee Retention
- How To Calculate Retention Rate
- Why Employee Retention Is Important
- A Guide To Merit Bonuses
- Unlimited PTO Guide For Employers
- PTO Policy Guide For Employers
Author
Caitlin Mazur
Caitlin Mazur is a freelance writer at Zippia where she has written 140+ articles that have reached over 1 mil viewers as of June 2023. Caitlin is passionate about helping Zippia’s readers land the jobs of their dreams by offering content that discusses job-seeking advice based on experience and extensive research.
