A lump-sum increase is something given instead of increase in salary. It is not added to the fixed base salary. It is given in the form of a single cash payment. This is the reason why it is also known as lump sum bonus.
While there are other uses but the best use of lump sum merit increase is as a substitute is salary increase for those employees whose fixed base salary has already reached a maximum for that particular position. The rationale for this is simple: the manager wishes to reward the employees for their good performance due to which the company benefited, so instead of increasing the salary, the manager offers a lump sum increase which is a one-time payment just for their good performance. The manager cannot increase the fixed base salary which has already reached its maximum for that job position so a lump sum increase is given.
In most of the cases, the amount given in the lump-sum increase is the same. It is calculated as a percentage of the fixed base salary. It varies from company to company as per their guidelines. For example, if the company guidelines suggests the employee should be given a 3% lump-sum increase then the employer will have to pay 3% of the current salary as lump-sum increase to the employee. Many a times the employer does not comply to the percentage as per the company rule. For example, if the company rule suggests the employee be given a 50% lump-sum increase then the employer can reduce the percentage.
In the interest of compliance with the Fair Labor Standards Act (FLSA), in situations where a non-exempt employee is involved, the employer must include this lump-sum payment while finding out the employee’s regular rate of pay for the purposes of paying overtime.