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HOW TO DIFFERENTIATE REWARDS FROM MERIT PAY AND THE PERFORMANCE APPRAISAL

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HOW TO DIFFERENTIATE REWARDS FROM MERIT PAY AND THE PERFORMANCE APPRAISAL

In a competitive business climate, more business owners are looking at improvements in quality while reducing costs. Meanwhile, a strong economy can result in a tight job market. So while businesses need to get more from their employees, their employees are looking for more out of them. Employee reward and recognition programs are one method of motivating employees to change work habits and key behaviors to benefit a business.

Reward vs. Recognition

Although these terms are often used interchangeably, reward and recognition systems should be considered separately. Employee reward system refers to programs set up by a company to reward performance and motivate employees on individual and/or group levels. They are normally considered separate from salary but may be monetary in nature or otherwise have a cost to the company. While previously considered the domain of larger companies, small businesses have also begun employing them as a tool to lure top employees in a competitive job market as well as to increase employee performance.

As noted, although employee recognition programs are often combined with reward programs, they retain a different purpose altogether. Recognition programs are generally not monetary in nature though they have a cost to the company. Recognition elicits a psychological benefit whereas reward indicates a financial or physical benefit. Although many elements of designing and maintaining reward and recognition systems are the same, it is useful to keep this difference in mind, especially for small business owners interested in motivating staffs while keeping costs low.

Differentiating Merit Pay and the Performance Appraisal

In designing a reward program, business owners need to separate the salary or merit pay system from reward system. Financial rewards, especially those given on a regular basis such as bonuses, gain sharing, etc., should be tied to an employee’s or a group’s accomplishments and should be considered “pay at risk” in order to distance them from salary.  By doing so, a manager can avoid a sense of entitlement on the part of the employee and ensure that the reward emphasizes excellence or achievement rather than basic competency. 

Merit pay increases, then, are not part of an employee reward system. Normally, they are an increase for inflation with additional percentages separating employees by competency. They are not particularly motivating since the distinction that is usually made between a good employee and an average one is relatively small. In addition, they increase the fixed costs of a company as opposed to variable pay increases such as bonuses which have to be re-earned each year.

Finally, in many businesses, teamwork is a crucial element of a successful employee’s job. Merit increases generally review an individual’s job performance, without adequately taking into account the performance within the context of the group or business.

Designing a Reward Program

The keys to developing a reward program are as follows:

  • Identification of company or group goals that the reward program will support
  • Identification of the desired employee performance or behaviors that will reinforce the company’s goals\
  • Determination of key measurements of the performance or behavior, based on individual or group’s previous achievements
  • Determination of appropriate rewards
  • Communication of program too employees

In order to reap benefits such as increased productivity, the entrepreneur designing a reward program must identify company or group goals to be reached and the behaviors or performance that will contribute to this. While this may seem obvious, companies frequently make the mistake of rewarding behaviors or achievements that either fails to further business goals or actually sabotage them.

If teamwork is a business goal, a bonus system rewarding individuals who improve their productivity by themselves or at the expense of another does not make sense. Likewise, if quality is an important issue for an entrepreneur, the reward system that he or she designs should not emphasize rewarding the quantity of work accomplished by a business unit.

Properly measuring performance ensures the program pays off in terms of business goals. Since rewards have a real cost in terms of time and money, small business owners need to confirm that performance has actually improved before rewarding it. Once again, the measures need to relate to a small business’s goals. An analyst says, “Performance measures in a reward program have to be linked to an overall business strategy.… Most reward programs use multiple measures which can include such variables as improved financial performance along with improved customer service, improved customer satisfaction, and reduced defects.”

When developing a rewards program, the entrepreneur should consider matching rewards to the end result for the company. Perfect attendance might merit a different reward than saving the company some cash through improved contract negotiation. It is also important to consider rewarding both individual and group accomplishments in order to promote both individual initiative and group cooperation and performance. 

Lastly, in order for a reward program to be successful, the specifics need to be clearly spelt out for every employee. Motivation depends on the individual’s ability to understand what is being asked of her. Once this has been done, reinforce the original communication with regular meetings or memos promoting the program. Keep your communication simple but frequent to ensure staffs are kept abreast of changes to the system. 

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Bernard Taiwo
I am Management strategist, Editor and Publisher.
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