Managing Employee Performance and Reward Concepts, Practices, Strategies

Merit pay is the most widely applied of the individual performance pay plans, and it takes two main forms: merit increments and merit bonuses. With merit increments – also known as merit raises – each employee typically receives an increase in base pay based on their annual performance assessment ranking or rating. These payments are referred to as merit raises or merit increments because they take the form of a permanent addition to base pay. By contrast, merit bonuses take the form of stand-alone payments that do not flow into the individual’s base pay and must be re-earned each performance round. In this chapter, we examine each of these two variants of merit pay, beginning with merit increment plans, which are the more traditional of the two.

We also consider some of the oldest and most enduring of all performance pay plans, namely, results-based individual incentives. Also known as individual ‘payment-by-results’ plans, these include piece rates, task-and-time bonus plans (where employees are rewarded for completing a specified volume of work or a task in less than a ‘standard’ time), sales commissions and bonus payments to individuals for achievement of goals. We consider each of these plans in turn, noting the advantages and drawbacks of each.