A merit pay increase is when an employer increases an employee’s pay rate based on the criteria they previously agreed upon. The increase is typically calculated as a percentage of the employee’s current salary.
This type of raise is used as a reward to help incentivize productivity and high performance in employees, while motivating their peers to do the same.
“Throughout my career, I have always encouraged people to look beyond the role and envision what needs to get done, always being two or three steps ahead,” Hammell said. “Those that [align] with this philosophy can move up the corporate ladder quickly. This then encourages others to walk the same avenue.”
Merit pay increases are different from a pay raise. Employees receive merit pay when they reach a set of goals agreed upon between them and the company. Pay raises may occur as part of a job promotion or as a percentage-based salary increase for an annual cost-of-living adjustment (COLA).
An employee doesn’t necessarily need to exceed performance goals to get a general pay raise, but they must do so to warrant a merit pay increase.
Did you know?Did you know? For HR departments to implement merit pay, they have to clearly state the criteria for how employees can achieve an increase. When HR can clearly set and measure goals, employees understand what they’re working toward.
Benefits of awarding merit pay increases
There are various reasons for awarding merit pay increases. First, it’s a way to clearly outline and state your company’s goals for the staff. By setting clear and measurable goals, a worker knows exactly what’s expected of them, and how their work contributes to your company’s overall production. Knowing there’s a pay increase if they can exceed specific goals can be a powerful motivation to perform well.
Another benefit of merit pay increases is that they allow your business to recognize high-performing employees – and, just as importantly, identify low-performing employees. Managers can evaluate their workforce person-by-person based on a set of goals, not by the team as a whole, to discover the best employees.
Those who exceed their responsibilities can receive merit pay increases and possibly future promotions, while managers can give employees who aren’t pulling their weight some steps to address those discrepancies.