What is merit pay?

Merit pay refers specifically to a compensation system where employees receive a raise in their salary based on their performance and productivity. The criteria for merit pay are typically established by the employer and can include factors such as individual performance appraisals, contributions to team goals, and achievement of specific objectives. This system incentivizes employees to perform at their best since their salary increases directly correlate with their work output and effectiveness.

In contrast, a bonus for outstanding annual performance is a separate form of compensation that rewards exceptional achievements without permanently altering the base salary. Fixed increases in salary regardless of performance do not acknowledge individual contributions and performance, which is contrary to the purpose of merit pay. Lastly, profit-sharing plans distribute a portion of the company’s profits to employees and are not directly tied to individual performance metrics like merit pay is. Thus, the essence of merit pay lies in its link to performance evaluation and established criteria, making it a targeted approach to compensation that aims to motivate employees by rewarding their specific contributions to the organization.