The Difference Between an Incentive Bonus & Merit Awards

Bonuses can be effective carrots if used wisely.
Bonuses can be effective carrots if used wisely. (Image: Stockbyte/Stockbyte/Getty Images)

If you are like most business owners and managers, you are constantly searching for ways to motivate employees with limited resources. Bonus programs can increase productivity and/or improve work quality, depending on how you set them up. Incentive programs usually target a specific goal, while merit awards reward excellent work. Many companies use a combination of approaches to target both productivity and quality.

Incentive Bonuses

Incentive bonuses are cash awards for meeting specific goals within a specified time frame. For example, you could offer any employee who makes $5,000 in sales in a week a $250 bonus. You might run this type of incentive during a sale or another period when you need increased productivity. If you can't afford to give all of your employees the bonus should they all earn it, or if you want to encourage friendly competition, offer bonuses to the top five or 10 earners during the incentive period.

Merit Awards

Rewarding exceptional work rather than increased productivity distinguishes merit awards from incentive bonuses. For example, you might give one to the employee who designs the best display or the one who consistently produces the highest-quality work. These awards typically are given to only a few employees, while incentive bonuses are available to anyone who meets the target goal. Be careful about how you structure one-time merit awards because employees could mistake them for a raise.

Motivation and Work Quality

Both types of incentives can increase employee motivation. Incentive bonuses can be fun, especially for employees who are competitive by nature. Keeping a merit award program in place can ensure that the extra work produced during incentive periods is of high quality. For example, you can give employees a bonus for producing 10 extra bracelets a day for the week or two before you need to ship them to stores for Christmas. Rewarding the makers of the three prettiest bracelets with an extra merit award encourages good work and reduces the likelihood that low-quality items will be produced to meet the bonus numbers.

Employee Satisfaction

Incentive bonus programs and merit awards can increase employee satisfaction. Well-structured programs make employees feel like they have an interest in company growth and that they are valued members of the team. Merit programs give employees something to work toward, which is a challenge that many people enjoy. However, if employees perceive the goals are unreasonable or impossible for them to achieve, then the programs either will be ignored or perceived as frustrating. Programs structured to reward competition between employees can also backfire if the competition negatively impacts teamwork.

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