Find the right compensation management software to develop a merit pay strategy.
It’s always nice to be rewarded for hard work.
While this once looked like a gold star sticker on a report card when we were kids, as an adult a reward for hard work, dedication, and a strong performance can instead be in the form of merit pay.
Merit pay, sometimes called incentive pay, is performance-based pay that gives employees who hit a target or perform their job in an exceptional manner a bonus or an increase to their base pay. The amount of merit pay is based on criteria set by the employer.
You’ll most commonly find merit pay in sales positions, as it provides a performance-generated salary based on an employee meeting or exceeding specific company goals. It’s also popular in education, as teachers can be awarded merit pay after being evaluated based on student test scores or supervised judgments.
A full breakdown is often found in the compensation and benefits section of the employee handbook, but even so, it can be tricky to understand how to create the right plan for your business, why you should have merit pay, and what could go wrong if executed incorrectly.
No matter your industry, leaders in all sorts of organizations use similar strategies as a way to improve performance. Two common ways are to implement merit pay and pay for performance, and they’re easily confused for one another. In order to get it right, you’ll need to understand how they’re similar and how they’re different.
For starters, merit pay incentives are typically given to individual workers based on individual performance. The benefits administration plan may designate specific funds to use as merit pay incentives and set specific parameters for workers to meet or exceed to be awarded these incentives. The incentives within merit pay plans are offered to employees as an equal opportunity to earn.
On the other hand, pay for performance is usually based on an annual salary increase due to performance. As an example, your organization may decide to set aside a specific percentage of their overall sales for a company-wide salary increase. It’s also common to see stock options awarded to individual high performers as part of a pay for performance plan.
In summary, merit pay is typically only used to reward individual performance, and pay for performance can be based on individual, team, or organizational performance. Also, merit pay is typically a one-time reward, while pay for performance can be seen as a long-term and ongoing program.
When done correctly, a merit pay system can not only increase your company’s bottom line but also bring some pretty big advantages to the table.
On the other hand, when your organization doesn’t take the time to build out a merit plan that works for your organization, its industry, and your employees, you’re bound to experience some challenges along the way.
Based on the Fair Labor Standards Act (FLSA), merit pay isn’t required but it can be added to or incorporated within an employee’s base salary as a bonus or an increase.
Whether you’re a small business owner or the CEO of a Fortune 500 company, it can be hard to know how and when to award a pay increase, especially ones that are tied to performance. It’s common to provide an annual wage increase to maintain a competitive drive, it may be unclear how and why you would give a pay increase that encompasses both a salary boost and an individual performance evaluation.
When determining merit pay, take the time to consider the budget of your organization while then developing performance-based metrics.
This way, you’ll have a better understanding of what you can pay without going over budget, and what going “above and beyond” looks like for each individual role within your company and how you can tie it back to the success of the organization as a whole.
Once you have a dollar amount in mind, determine how performance will relate to an employee receiving their merit pay. You’ll also want to be sure that the same percentage is given to each employee. For example, your high performing sales leader should receive the same percent increase as a high-performing web developer.
You’ll also want to create employee performance scorecards. These will help you to determine whether the employee was a high performer, exceeded their goals, and went above and beyond what they were asked to do.
This scorecard will likely weigh some of the evaluation criteria more heavily so that certain goals and achievements are given more value and impact the overall performance “score” more than others.
In order for your business to determine who should receive merit pay, figure out the goals for the entire organization. Have a strategic plan for the year, and then drill down further into the objectives of each department. Doing so will allow you to have clear metrics for each employee and the goals they’ll need to meet to receive a merit increase.
Finally, it’s all about clear communication to all employees so they know what will be expected of them in the future.
Make sure to properly share:
In order to make determining merit pay easy, and free of mistakes, it’s in your best interest to use compensation management software that can not only report on company compensation data and manage salaries through one dashboard, but also develop what the merit pay model should look like.
These tools can streamline the management of various types of compensation, not just merit pay, but also base pay, commissions, overtime pay, bonuses, and stock options.
No matter how big, how small, or how often you decide merit pay is necessary, it can go a long way with showing that you’ve noticed the hard work and dedication your employees have shown.
As long as you take the time to do merit pay the right way, your employees are sure to feel appreciated and strive for greatness in the future.
Looking for more ways to award a teammate who has gone the extra mile? Check out the 17 types of employee benefits your organization can offer.
Mara is a Senior Content Marketing Specialist at G2. In her spare time, she's either at the gym, reading a book from her overcrowded bookshelf, enjoying the great outdoors with her rescue dog Zeke, or right in the middle of a Netflix binge. Obsessions include the Chicago Cubs, Harry Potter, and all of the Italian food imaginable. (she/her/hers)
Find the right compensation management software to develop a merit pay strategy.
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