Santa Claus is a great example of merit pay. If you do a good job at work you end up on the nice list. Therefore you may get more presents because your performance rating is nice. Being on the naughty list would make it so you would receive red coal. Red coal because black coal would be a positive and red usually means negative. If in the case of you are naughty and want to be nice then you would need to be earning a relatively low amount of presents to achieve an increase. This method is called merit increase grid.
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