A bonus is an incentive payment that is given to an employee beyond one's normal standard wage. It is generally given at the end of the year and does not become part of base pay.
Merit pay is a reward based on how well an employee has done the assigned job. The payout is dependent on individual employee's performance. Performance is evaluated in a subjective fashion. Advocates of merit pay call it the most valid type of pay increase. Rewarding the best performers with the largest pay is claimed to be a powerful motivator. Performance that is rewarded is likely to be repeated. People tend to do things that are rewarded. Generally speaking, individuals are goal oriented and financial rewards can shape an individual's goals over time. When high achievers are rewarded, they set the benchmarks for others to follow. Merit raises, unfortunately, may not always achieve their intended purpose. Unlike a bonus, merit raise may be perpetuated year after year even when performance declines. When this takes place, employees come to expect the increase and see it as being unrelated to their performance. Evaluating merit, further, is not easy. In most cases, merit raises may be based on seniority or favoritism or sometimes just to cover rising inflationary pressures. Subordinates who are politically, socially and familially connected inside and outside the organisation, who have clout and who can hurt the supervisor in some way are likely to receive a larger share of the merit pie than their performance may warrant. Compensation specialists find fault with merit raises on
the following grounds:
i Tying pay to goals may force people to be narrow-minded; they may focus on
goals that are measurable, easy to achieve and avoid the more important goals.
ii It is difficult to define and measure performance objectively.
iii Employees fail to make the connection between pay and performance.
iv Every supervisor may not be a competent evaluator.
v There may be lack of honesty and cooperation between management and
employees. Politics may come to pay a major role in recognising meritorious
vi The size of merit award has little effect on performance. Merit plans can work in cases where the job is well designed and the performance
Lumpsum Merit Pay
In this case, employees receive a single lumpsum payment at the time of their review – which in any case, is not added to their base pay. Such merit increases help the employer keep the wage bill under control as they do not contribute to escalating base salary levels. Employees receiving the fat, lumpsum merit payments are able to clearly identify the linkage between pay and performance.

criteria are both well delineated and assessable.

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