There are many ways to incentive performance in an organization.

Typically grouped together under the umbrella term “pay for performance plans,” employers may choose among merit programs, bonus options, and individual or team incentive plans. In order to manage employee merit, bonus, and incentive plans effectively, however, it’s important to first understand the key differences among these types of pay. Below is a brief description of each.

  • Bonus Plans: Bonus plans can be based on any number of metrics, which may incorporate factors such as how long the employee has been with the organization, their role and responsibilities, and their job level. For instance, a manager might receive a bonus for keeping costs down in their department. In addition to individual bonuses, team bonuses can be given to reward and incentivize accomplishments across a group of employees. Sales bonuses are also used frequently to reward sales staff for meeting specific goals within a given period of time.
  • Merit Pay Plans: Merit pay plans aim to motivate employees to perform their best. This form of pay consists of a raise in the salary and is typically based solely on the employee’s performance, independent of other factors such as a promotion or time spent at the company.
  • Incentive Plans: Like pay-for-performance plans, “incentive plan” tends to be used as an umbrella term to describe any plan used to motivate an individual or group of employees. With that said, there are specific types of incentive plans, including 401(k) incentive plans in which the company contributes to the employee’s retirement plan up to a certain amount.

Which is Right for Your Company?

Determining which type of pay for performance plan is right for your organization will require you to consider a number of key factors. If high levels of motivation are required, for instance, merit pay can be useful. Yet, over time, this option can become very costly, as the value of the merit-based raises carries forward cumulatively. If long-term costs are a concern, short-term motivators, such as bonus and incentive plans, may be a more fitting option.

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