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Bonus or Salary Increase: Which Type of Raise Is Best For You?

Posted by Eileen Hoenigman Meyer

Career Advice Expert

Last Updated Oct 18, 2016
|3 min read

It’s always good news when you learn that you’re getting a boost in pay. But there’s a range of possibilities for what a raise can look like.

Some companies offer an annual raise that functions as a cost of living increase (COLA). This boost in pay is applied across the board to bump up all employees’ salaries, allowing paychecks to keep pace with inflation.

Other companies offer bonuses, known as merit-based raises, that are applied using a metric to evaluate and reward each employee’s professional contribution. Offering merit-bases raises or other variable pay such as bonuses tends to be favored over applying an annual one-size-fits-all COLA.

Read on to learn some other differences between a COLA and a merit-based raise, along with what each suggests about employee performance.

Cost of Living Increase

Government jobs, as well as some non-profit sector position, adhere to the cost of living salary increase model. In December 2015, for example, President Obama announced that all federal employees would earn a 2016 pay increase of 1.3%. Those in more expensive cities like Washington D.C. or San Francisco earned a slightly higher raise to account for their higher cost of living. When a flat-rate salary increase is given across the board to all employees, it is likely a COLA.

While a pay raise is always welcome, it can be a bit of a blow to morale when everyone earns the same pay raise, regardless of how well each person did his or her job. In some cases, a merit raise can be applied on top of the COLA. This way, the raise functions both as a means to ensure that all employees get a needed boost, and exemplary employees earn their proper nod.

Merit-based raises

Stephen Miller who writes for the Society of Human Resources management (SHRM) notes, “Increasingly, employers are shifting toward variable pay based on performance and away from cost of living raises—although pay ranges may be adjusted due to general industry pay trends, as positions become more or less in demand in the local labor market.”

Variable pay includes merit-based raises and bonuses. These are usually calculated by applying a formula to access employees’ performance and then divvying up the available funds according to which employees earned the highest marks.

A recent compensation report examined trends based on survey results from 7,500 business leaders in several key industries. The report explains: “Merit still matters most, with 50% of employers giving raises based on performance. However, bonuses are also a strong focus for compensation plans this year.” The report notes that the proportion of employers offering bonus pay has steadily increased. The data suggests that 74% of the companies surveyed now offer bonuses, compared with 69% in 2013.

Many employers find that more varied compensation packages are appealing to their employees. The report continues: “Top performing companies [companies that surpassed 2015 revenue projections] also offer more of a compensation mix than average companies. They offer everything from merit-based pay plans, to nondiscretionary incentive-based pay plans, to discretionary bonus plans, stock options, learning and developmental opportunities, as well as other perks like gym memberships or catered lunches.”

Rather than applying their resources to an annual cost of living increase that is uniformly administered, employers are increasingly likely to favor merit-based increases and other incentives that recognize excellence and make employees happier in their day-to-day work lives.

Great to know when you’re walking into your next performance review!

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