Differentiating the Rewards from Merit Pay


In designing a reward program, a small business owner needs to separate the salary or merit pay system from the 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 small 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.

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In contrast to bonuses, merit pay involves giving employees a permanent pay raise based on past performance. Often the company's performance appraisal system is used to determine performance levels and the employees are awarded a raise, such as a 2% increase in pay. One potential problem with merit pay is that employees come to expect pay increases. In companies that give annual merit raises without a different raise for increases in cost of living, merit pay ends up serving as a cost-of-living adjustment and creates a sense of entitlement on the part of employees, with even low performers expecting them. Thus, making merit pay more effective depends on making it truly dependent on performance and designing a relatively objective appraisal system.

What are Compensation Factors that Management Should Consider?

When you are setting wages for your employees there are many factors to consider. Their compensation should be determined by more than just whether they can work for you or not.

You need to make sure that you are considering what compensation factors will affect those that work for you. You have to remember that employees are going to go where it is going to benefit them most. That means that you need to be able to make a good offer if you want them to work for you.

Here are a few ideas for compensation factors to consider. For each business there will be different applications, so not all of them are right for your business.

What type of business you have. If you are a retail store then commission will work great, but if you are a production company then sales won't affect many of your workers. The different departments and divisions within the business will make a difference too. The waitresses will be able to collect tips but the cooks aren't out with the customers to be tipped.

The list of responsibilities and duties that are expected of the employee. At the bottom of the food chain there will be less responsibility, if the person that just got hired is making the same as the supervisor over them, but the responsibilities are different, you might find you have some upset supervisors. As their job requirements increase there should be more compensation given.

The time and effort that is put into the job. You will find that some employees have a drive to do everything they can to give it their best. Others will be more inclined to take the minimum workload and be done with work the second the clock tells them it is okay. For those employees that volunteer to do more and that give a great effort, there should be more compensation. If you are looking for committee members to put together a presentation, give them extra pay for the time they put into it.

On that same note, you will find that some people are picking up the slack from those that are just there to do the least they can. For those that are taking on extra and doing all they can to make up for those that don't care, there should be a reward. They should be recognized for their efforts and compensated likewise.

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When an employee is hired look at their education. If they have an accounting degree and you are looking for a financial adviser or an accountant, then you should be willing pay a little more for their knowledge. You will have applicants that come in under and over qualified, make sure that you have enough compensation budgeted that you can hire the person with the right knowledge for your company.

Look at their work history. If they have years of experience, they should be compensated. Those years help you to have that much more of an advantage, adding their education to their experience you may have someone that can make a big difference in your company. Also, if you are hiring even for the smallest job, then you need to know that they are going to be with you for at least a good amount of time. It is expensive to train, so if you can reward them for being at their past jobs for an extended amount of time then you might find a loyal employee.

Remember that happy employees are the only way to keep a business running in the right direction.

How to Motivate Employees:

Why not update the "Employee of the Month" program. Instead of posting their picture and giving them a wonderful parking space, give them something they might actually enjoy...Something that will motivate your staff to be the best they can be...

Start by setting a goal for your staff. Letting them know what you would like do and letting them help come up with a plan of action to reach that goal. 

Now the fun part...tell them what their reward will be for completing the task.

Motivate employees with a free day

Give them a "free pass" - this could be a pass for a free day off from work (one that won't count against their vacation and/or sick days) - The "free pass" can have a deadline for use date on it (you don't want them saving up 5 free passes so they can take a whole week off) - or the "free pass" can be for so many hours, so they can earn hours off with each pass. A day off with pay is something every employee will enjoy! It will motivate employees to work for those free passes...

Family Day

Why not have a "Gonna Have Fun Day" - This can be as easy as family passes to a local Amusement Park; A family day at the local town park with a cookout, kickball/baseball game, etc.; or take a class together at a Home Improvement store, ceramic painting or something other art class. Let your staff give input on what they would like as a "fun day" and go for it. A little fun never hurt anyone.

Motivate Employees with donuts

Something as simple as buying donuts and coffee for your employees once a week and discussing something other than work for an hour will motivate employees also. Your employees wants to know you care, so taking the time to really talk to them and getting to know them will help motivate them to do more as an employee.

Individual Bonuses

Bonuses are one-time rewards that follow specific accomplishments of employees. For example, an employee who reaches the quarterly goals set for her may be rewarded with a lump sum bonus. Employee motivation resulting from a bonus is generally related to the degree of advanced knowledge regarding bonus specifics.

Team Bonuses

In situations in which employees should cooperate with each other and isolating employee performance is more difficult, companies are increasingly resorting to tying employee pay to team performance. For example, in 2007, Wal-Mart gave bonuses to around 80% of their associates based on store performance. If employees have a reasonable ability to influence their team's performance level, these programs may be effective.

Organizational Examples:

Following rewards and compensation benefits are seen in different renowned organizations around the globe.

Wal-Mart Stores: -

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One of the basic activities that lead Wal-Mart to successfully manage its people is motivation. Motivation is alive through all levels of positions at Wal-Mart. This company motivates employees in many different ways in order to prove that the company is not only care about profit they can gain from employees but also employees' crises. 

One of the facts proved about this motivation is the used of term "association" instead of "employee".

From hourly associations to top managers or even the founder of the company is calling each other by their first name only. Everyone in the company is getting more involves by calling the other's first name because it can create a family-oriented business instead of boss-oriented one. 

Moreover, people at Wal-Mart are full with respect regardless of their position. 

All associations at Wal-Mart and their immediate family can get a health insurance at a very low price which includes primary doctor, pharmacies, vision, and dental.

Wal-Mart also helps the associations' crisis by hiring a special psychologist team to counsel on their problems.

Mobilink GSM - Pakistan

Mobilink runs its business on the basis of its belied that "Our people are our greatest assets. We take great pride in acknowledging the contribution each one of us makes".

Mobilink use the following techniques to motivate their employees:

Management by objectives

Employee recognition programs

Employee involvement programs

Variable pay programs

Skill-based pay plans

Flexible benefits.

Nestle Pakistan Ltd.

Defined contribution plan. The Company operates a recognized provident fund for all its regular employees, excluding expatriates. Equal monthly contributions are made to the fund both by the Company and the employees at the rate of 12% of the basic salary plus cost of living allowance. The company is contributing in recognized provident fund for the welfare for their employees and they have intention for the betterment of them. The employees knowing that the company is contributing for their future, they invest their energy for the sake of organization.

Nestlé's commitment to sustainable development is accomplished by integrating occupational safety, health and risk management program at all workplaces to provide a healthy and safe work environment for employees, contractors and visitors. Exercising this commitment and reflecting its benefit to the community remains central to our business strategy for today and tomorrow.

Nestlé regards its personnel as its most valuable asset. Involvement at all levels starts with open communication, whether on specific aspects of the business, or about the activities of the Company in general. Suggestions for changes and proposals for improvements of Nestlé's practices are encouraged.

Other than these factors Nestle also providing their employees many other facilities in order to motivate them and feel happy to work for the organization.

A list of other benefits working as motivation factors among the employees of Nestle Pakistan.

Higher salary

Job Security



Old age benefits

Residence facilities


Health and safety

Telenor Pakistan Ltd.

As we know Telenor is highly aware of how to motivate its employees in the best way.

This can be judged by the enthusiasm and good spirit that people show in performing

their jobs. There is a well-devised system that Telenor follows for the purpose of

motivation. It includes both financial and non-financial rewards along with the major

Motivators and Dissatisfies. The company recognizes the importance of making people drive towards their goals and the basic step towards this is made through recognizing the value of importance that the company gives to its employees. Telenor has a set of financial rewards, medical, dental, vision and life insurance, retirement plan, paid vacation days, family and work life balance benefits and profit sharing plan, Annual bonus opportunities, company cars etc.

Other ways in which employees are motivated are:

Everyday residence issues (remodeling, repairs, house-sitting, etc.).

Legal matters.

Financial issues

Education and schooling.

Parent and child care.

Resources for seniors and eldercare issues

Emergency dependent-care reimbursement.

Adoption assistance.

Tesco - UK

Staff training

Discount for staff purchases

Club points


Communication(team 5)

Bonus(from mystery shopper, audits)

Free uniform

Holidays/holiday vouchers

Open opportunities 

Unilever - India

Team building activities, workshops, inspirational quotes, and the power of positive experience.

Assuming Employee and organization are one and the same.

They organize games &other inspirational references and activities which help motivation and motivational training to the fresher in order to enable the freshers to get more accustomed to the corporate environment.

They try building confidence in employees by encouraging team work in the form of group discussions, by making them free to express their opinions.

Personal Motivation styles and Learning Motivation.

The company organizes group as well as individual presentations so as to improve the communication skills of the employees and make them more interactive.

The management also welcomes their employees to be a part of the procedure of decision making and problem solving.

The company inspires their employees by giving them rewards for their good conduct and efficient work.

Apart from these the other motivational techniques are:-

Provident Fund

The Health Expenses of the employees and their families

Leave with pay

Pension schemes.

Transport Facilities.

Training boot camp for fresher.

They have setup Yoga and Meditation Centre for employees to handle stress and well equipped Health Centre.

Maternity benefit.

Flex Industries Limited 

We have a generous incentive program, which has helped us increase productivity by 30-40% as well as minimize wastage by 2-3 %. Incentives are offered to all genres of employees, and we have seen that they have greatly helped in raising morale as well as performance. Besides, every employee gets a chance to work abroad at our unit in UAE on a rotational basis, which acts as a major motivator. In fact, we have found that our motivational programs have not only helped us reduce absenteeism, but also reduced attrition levels from 12% to 8%.




Professional Growth



Remuneration and benefits


A Learning Environment

A Fair Wage Policy

Regular Medical Examination

Openness and Respect

Measuring Progress


Encouraging Diversity


Attractive employment

Job security

Good working climate through leadership and cooperation

Remuneration in line with performance

Personal development opportunities

Product and company image

Coca Cola

By providing competitive compensation and benefits, we strive to motivate our employees while limiting employee turnover. In addition to compensation and benefits, we also offer numerous other programs for our employees that extend beyond the workplace. For instance, as part of our commitment to youth development, we offer college scholarship opportunities to the children of our employees.  We also provide opportunities for employees to improve their educational standing.


It is a good practice to do the job analysis first as a part of restructuring process because Job analysis is a cornerstone of human resource management.

Job analysis is a Systematic process of determining the skills, duties, and knowledge required for performing jobs in an organization.

Summary of Types of Data Collected Through Job Analysis

Work Activities - work activities and processes; activity records (in film form, for example); procedures used; personal responsibility

Worker-oriented activities - human behaviors, such as physical actions and communicating on the job; elemental motions for methods analysis; personal job demands, such as energy expenditure

Machines, tools, equipment, and work aids used

Job-related tangibles and intangibles - knowledge dealt with or applied (as in accounting); materials processed; products made or services performed

Work performance - error analysis; work standards; work measurements, such as time taken for a task

Job context - work schedule; financial and nonfinancial incentives; physical working conditions; organizational and social contexts

Personal requirements for the job - personal attributes such as personality and interests; education and training required; work experience

What job analysis is?

It is a systematic method for gathering information

It focuses on work behaviors, tasks, and outcomes

It identifies the personal qualifications necessary to perform the job and the conditions under which work is performed

It reports the job as it exists at the time of analysis; not as it was in the past nor as it exists in another organization

Importance of Job Analysis:

Place employees in jobs that use their skills effectively

Determine needs for new and experienced employees

Plan for future human resource requirements

Evaluate how environmental challenges affect individual jobs

Eliminate unneeded job requirements that can cause discrimination in employment

Match job applicants and openings

Create plans to develop employees

Set realistic performance standards

Human Resource Planning:

Manpower planning or HR planning are synonymous. HR planning is more broad-based. Hereinafter, we will call it Human Resource Planning or HRP in short.

Human resource planning is the process of anticipating and carrying out the movement of people into, within, and out of the organization. Human resources planning is done to achieve the optimum use of human resources and to have the correct number and types of employees needed to meet organizational goals.

We also can say that, Human resource planning is the process of systematically reviewing human resource requirements to ensure that the required numbers of employees with the required skills are available when and where they are needed.

Human resource planning includes four factors:

Quantity : How many employees do we need?

Quality : Which skills, knowledge and abilities do we need?

Space : Where do we need the employees?

Time : When do we need the employees? How long do we need them?

Definition of HR Planning"

Quoting Mondy et (1996) they define it as a systematic analysis of HR needs in order to ensure that correct number of employees with the necessary skills are available when they are required.

When we prepare our planning program, Practitioners should bear in mind that their staff members have their objective they need to achieve. This is the reason why employees seek employment. Neglecting these needs would result in poor motivation that may lead to unnecessary poor performance and even Industrial actions.

Need / Importance of Human Resources Planning (HRP)

HRP is a double-edged weapon. If used properly, it leads not only to proper utilization, but also reduces excessive labor turnover & high absenteeism, improves productivity and helps to achieve organizations goal. On the other hand, faulty use leads to Disruption in flow of work, lower productivity, less job satisfaction, lower production & high cost of production.

Human Resource Planning (HRP) is a needed for following reasons:

To ensure optimum use of manpower and capitalize on the strength of HR. The organization can have a reservoir of talent at any point of time. People skills are readily available to carry out the assigned tasks, if the information is collected and arranged beforehand with the help of effective HR Planning.

To forecast future requirements (this is done by keeping track of the employee turnover.) and provides control measures about availability of HR labor time. If, for example the organization wants to expand its scale of operations, it can go ahead easily. Advance planning ensures a continuous supply of people with requisite skills who can handle challenging jobs easily.

To face the challenges the business is facing due to turbulent and hostile environmental forces (e.g. technology, social, economic and political upheaval) impinging on single one of them. Although planning has always been an essential process of management, increased emphasis on HRP becomes especially critical when organizations consider mergers, relocation of plants, downsizing, or the closing of operating facilities.

To face Rapid Technological Changes. The myriad changes in production technologies, marketing methods and management techniques have been extensive and rapid. Their effect has been profound on job contents and job contexts. These changes cause problems relating to redundancies, retraining and redeployment. All these suggest the need to plan manpower needs intensively and systematically.

To face Organizational Changes. In the turbulent environment marked by cyclical fluctuations and discontinuities, the nature and pace of changes in organizational environment, activities and structures affect manpower requirements and require strategic considerations means perfect HR Planning.

To determine recruitment/induction levels. We may explain this with an example: manager wants to determine what kind of induction the organization will require at such and such date. If we have a ready HR plan, we will have fairly good idea what kind of people are being recruited and at what position. Thus we can successfully plan our induction level.

To determine training levels and works as a foundation for management development programs

To know the cost of manpower if there is a new project is being taken up, example: in cases of expansions or a new factory, one would naturally requires more human resources, hence a budgetary allocation can be made in advance for this upcoming corporate strategic move.

To assist in productivity bargaining. For example, if a firm is going fully automated, it can negotiate for lesser workers as required for the same amount of the job by using the manpower predictions regarding the same. It can offer higher incentives to smoothen the process of voluntary layoffs.

To assess accommodation requirements. We may have a question, how that can be related to HRP? A good HRP can assist in solving many problems of the firm, from day to day ones to very strategic ones, too. For example: an organization decides to establish its production center in a remote area, an accurate HR plan can help it to decide how many people will be required there, and thus start the process of establishing a township for them in advance. The physical facilities such as canteen, school, medical help, etc., can also be planned in advance.

Factors Needed to be considered when increasing pay

Consideration should be given to the following factors when determining whether an employee should receive an increase for a lateral move. These factors should also be considered when determining the amount of the increase.

Knowledge, Skills & Expertise

Are the skills and knowledge that an employee brings to the new job/position significantly greater than what others might bring?

How much value does the employee's previous experience add to the new role?

Is this combined skill set of greater value than a single skill set of a typical incumbent?

Consider also the perspectives and maturation gained from multiple, diverse workplace experiences.


Will the employee be expected to work with/seek consensus from considerably more internal/external constituents, and are they of a higher level than those he/she currently collaborates with?

Communication Effectiveness

Will the level of communication (both written and oral) be higher; i.e. ability to interact with others, develop factual and logical presentations of one's ideas, adapt to listener/audience styles?

Influencing and leading

Will the employee be expected to negotiate, set his/her own standards and goals, and/or manage or coach (either formally or informally) at a higher level than in his/her current position?

Critical thinking and problem solving

Will the issues in the new job/position require a higher level of analysis, innovative/creative thinking, and ability to adapt to or modify established approaches to find and implement solutions?

Responsibility and accountability

Will the impact of decisions and/or their level of consequence be greater in the new position?