What is a merit increase

A merit increase is a salary raise offered to workers to recognize their performance, achievements, or contributions to the company. It is typically awarded after performance evaluations and it is different from general pay raises adjusting for inflation or seniority. The primary objective of merit raises is to motivate and retain top talent.

Is a merit increase a raise or a bonus?

A merit increase is a permanent raise awarded to employees on their base salary for consistent contribution to the company’s growth. On the other hand, a bonus is only a one-time payment made to employees to recognize a specific achievement.

What is the difference between a pay raise and a merit raise?

A merit raise is a specific type of raise awarded to high performers to recognize their contribution. On the other hand, pay raises are offered based on cost-of-living adjustments, seniority, and market adjustments.

What is the main purpose of a merit increase?

The main purpose of a merit increase is to reward employees for their performance and contributions to the organization’s growth. Employers provide merit pay increases to incentivize employees to continue their great work and show appreciation.

Why do companies give merit increases?

Companies offer merit increases for the following reasons:

1. Boosting morale: It boosts the morale of employees by recognizing their efforts. It motivates them to consistently put their best foot forward
2. Retaining top talent: It incentivizes top talent to stay in the company. Companies are consistently providing merit increases to retain talent. According to recent research, 62% of organizations plan to give employees off-cycle salary increases, additional compensation not tied to annual performance reviews to help retain talent
3. Aligning with business goals: Through merit increase, organizations can directly link high performance to working on goals that contribute to organizations’ growth. It helps companies align employees’ efforts with strategic business goals
4. Staying competitive in the talent market: 35% of companies struggle with employee retention, highlighting the competitive talent market. Merit increases can be one of the value propositions for the company to attract/retain talent and stay ahead in the tough market.

How does a merit increase differ from other types of salary adjustments?

Merit increases differ from other types of salary adjustments, which are usually done for:

• Cost-of-living adjustments (COLA): These are increases typically given to employees to adjust to rising living costs. 88% of US workers are struggling to meet basic living costs with rising inflation; US companies can adjust salaries to match inflation and increasing cost of living.

• Promotions: When workers take on a new role or get a promotion, their salary is also adjusted. This pay increase is outside of the usual performance appraisal cycle.

• Market adjustments: Lastly, employers also adjust salaries for a role according to market standards from time to time. With increased pay transparency, employees have access to pay range information for their roles through job portals. They want their salaries to be in line with market standards. As a result, 51% of companies have a market pricing strategy as part of their compensation strategy.

What factors do companies consider when determining a merit increase?

The key factors that impact a merit increase are:

1. Performance evaluations: Performance evaluations define who are eligible for a merit increase. Managers assess an employee’s performance based on predefined metrics or goals, and high-performers become eligible for the increase. Employees whose work directly aligns with organizational objectives would be prioritized for merit increases
2. Company budget: The organization’s financial situation and budget constraints influence the size and frequency of merit increases
3. Pay range for the position: Employers also consider where an employee’s current salary falls within the established salary range for their role, and there is scope for further increase
4. Tenure: While not the primary factor, an employee’s length of service may sometimes be taken into account when determining eligibility or the size of the increase

Also read: How to measure employee performance and conduct a performance review meeting.

What role does HR play in the merit increase process?

HR plays a key role in defining the merit increase process by:

• Developing policies: HR develops policies for merit increases in the company. The policy outlines the performance evaluation, merit increase criteria, eligibility, and approval process. HR creates fair policies that eliminate any bias in the process
• Providing tools and frameworks: HR creates frameworks and implements tools for conducting the entire performance evaluation and approval process
• Budgeting: HR also looks into the company's overall budget to determine how much pay increase the organization can provide
• Communicating: HR also defines the official communication process for merit increases

Read more: How to Run Merit Cycles: A Complete Guide for HR Leaders

What is a typical merit increase for a job?

The average merit increase was 3.3% in 2024 overall across all industries. Industry-wise, merit increase stood at:

• Healthcare services: 3.0%
• Insurance: 3.2%
• Retail and wholesale: 3.2%
• Banking/Financial services: 3.4%
• Life sciences:3.4%
• Other manufacturing: 3.4%
• Energy: 3.5%
• High-tech: 3.5%

What is a good merit increase?

A good merit increase is typically around the industry average, which currently stands between 3% and 3.5%.

How are merit increases typically communicated to employees?

Managers typically inform employees of any merit increase through a one-on-one meeting. In this meeting, the manager acknowledges the employees' efforts, explains which achievements made them eligible for the increase, and then communicates the hike. This transparent communication ensures the employees stay aligned with company goals.

After the meeting, employees will receive an official salary increase letter from HR.

How often should merit increases be given?

Most companies couple merit increases with performance reviews (annual, semi-annual, or quarterly).

A majority of companies (76%) conduct annual performance reviews, and some conduct them twice a year or quarterly.

How do merit increases benefit employees and organizations?

Merit increases benefits employees by recognizing their hard work and providing them with a tangible incentive. It further motivates them to strive for excellence and contributes to long-term growth.

For organizations, merit increases help engage and retain top talent, enabling them to produce their best work. As merit increases are tied to company growth, they ensure employees stay aligned with organizational goals. Merit increases can be one of the value propositions for the company to attract/retain talent and stay ahead in the tough market.

How can managers ensure fairness when awarding merit increases?

To ensure fairness when awarding merit increases, managers can:

• Use career paths: Career paths define expectations for every role and how to advance in the department. These career paths are already accessible to employees, who know the expectations in advance
• Create development plans: Employees and managers can collaborate to create development plans that provide a structured roadmap for individuals to grow and contribute to the organization
• Conduct 360-degree feedback: A 360-degree feedback system creates well-rounded feedback from all possible sources: peers, direct reports, and managers. Managers get more context to provide well-balanced merit increases
• Build merit matrix: A predefined merit matrix provides structured ratings and guidelines for an increase to ensure the process is conducted bias-free and within the organization’s budget
• Conduct performance calibration meetings: In performance calibration meetings, managers come together to discuss the proposed rating of their team members with other managers. Different managers argue why they think particular employees deserve a particular rating. This step reduces bias and also brings consistency in evaluation across teams

What challenges might organizations face when implementing merit increases?

Organizations often face these challenges while offering merit increases:

1. Employee expectations: Some employees may feel entitled to a merit raise and become demotivated when they don’t get one. The best solution to this would be to create career paths. Career paths set criteria for growth in any role or department in advance and prevent last-minute surprises.
2. Communication gaps: Lack of transparency in the merit increase evaluation process creates a negative notion about the entire exercise. Often, this lack of transparency is just poor communication from the management end. However, employees feel it’s a biased exercise as the information is not shared with them in advance. To overcome these issues, managers can arrange one-on-one meetings with employees and assist them in creating development plans that are in line with the organization’s expectations/defined career paths.
3. Bias in evaluations: The entire merit increase exercise can also become skewed due to the manager's bias and personal preferance or relationship with different team members. A 360-degree feedback from different sources and levels is more bias-free.
4. Budget limitations: Organizations may have a limited budget, and only the best out of the best could be given merit increases at that time. In such cases, a performance calibration meeting where managers come together and discuss why their team members deserve a particular raise will help narrow down the list further.

How can merit increases impact team dynamics?

Merit increases can have both positive and negative impacts on team dynamics. On the positive side, it can motivate employees to perform at their best, fostering healthy competition and collaboration. On the other side, employees who do not get a raise can become demotivated.

Let’s consider a fictional example. Clara, a team member who received a raise, is already taking the lead on the next production release. On the other hand, Samuel, who did not get a raise, is already looking for another job and skipping meetings. This is a common scenario in many companies after any yearly appraisal.

Transparency and regular communication can minimize all these issues. The entire merit process has to be clear for employees from beginning to end. Set clear expectations via career paths, regularly communicate via one-on-one meetings, and conduct fair evaluations via 360-degree feedback capabilities.

What metrics can be used to evaluate the success of a merit increase program?

Merit increases are to retain and motivate the best talent. But how does all this translate into tangible metrics to track? Here are a few metrics HR and management can track to measure the success of merit increase program:

• Retention rates: Is your turnover rate decreasing, particularly among top performers?
• Employee engagement: Are routine pulse surveys showing any increase in employee engagement levels?
• eNPS (Employee Net Promoter Score): Are more employees willing to recommend the company as a place to work?
• Employee performance metrics: Is there any increase in the productivity level of employees?
• Employee feedback: You can also conduct pulse surveys and get an employee satisfaction score to assess if employees are happy with the merit increase process.
• Manager feedback: Separate surveys can also be used for managers to assess whether they find the merit increase process helpful in rewarding talent. That will also give a manager satisfaction score.

Manage global worker compensation and performance with Deel

Deel can help you couple compensation with performance management and run bias-free merit-increase workflows. Use our performance management solution to run fully customizable feedback and performance reviews. Link performance scores to compensation decisions with Deel Compensation.

To further remove bias from this process, Deel helps you to:

• Create transparent career paths to set role and level-specific expectations
• Conduct performance calibration for standardization
• Conduct regular one-on-one meetings with employees for clear communication
• Conduct surveys to get manager and worker feedback

Book a quick demo to define your performance and compensation strategies.