What is a merit increase?

A merit increase is a salary raise granted to an employee for outstanding work performance or achievements. Eligibility for a merit increase is based on a company’s budget, internal criteria, merit metrics system, and the employee’s value in the job market.

Companies use merit increases to reward top-performing employees and to motivate others to improve their work productivity.

Why should HR leaders care about merit increases?

A well-designed and effective merit increase program that rewards deserving employees can boost employee: 

  • Retention
  • Productivity
  • Engagement

Keeping high-quality employees engaged and motivated can minimize the number of new employees a company has to recruit and hire, thus reducing company costs. Moreover, implementing a well-planned merit increase system can help retain stellar employees who contribute to company success.

What can HR leaders do to effectively implement merit increases?

HR leaders can create a comprehensive merit increase system which promotes employee engagement, retention, and productivity, built upon these essential proponents: 

  • Design the criteria. HR leaders can develop realistic goals that motivate employees to boost their work performance yet still allow for a healthy work-life balance. HR can also work with compensation managers to create a merit matrix — a fair and accurate calculation of the merit increase displayed in an easy to read grid.
  • Determine and explain the criteria to everyone. Its essential to define the criteria and clearly communicate it to managers and employees. Managers should explain the criteria to employees, clarifying the benchmarks they need to reach to qualify for a merit increase. The criteria should be fair and transparent, so that they can stimulate hard work and motivation among employees, rather than disappointment and resentment.
  • Offer frequent merit increases. HR leaders can integrate merit increases throughout the year, so that every time an employee reaches a set goal, HR can reward the employee for their performance with a competitive, budgeted, merit increase, to drive continued employee momentum.
  • Recognize employee achievements. HR leaders can build team spirit in the office by recognizing employee achievements through a shout-out, a simple public “thank you,” or a small team celebration. This can help foster camaraderie within the company, reminding employees that everyone can be happy for others’ successes.
  • Take a holistic approach. Relying on merit increases alone probably won’t create the desired results of increased employee engagement, productivity, and retention. However, implementing merit increases into a company that shows respect and appreciation for its employees, offers competitive base salaries, and boasts management who can coach and mentor their employees, which can lead to greater employee and employer success.

How does the successful implementation of merit increases affect company culture?

Budgeted, carefully calculated, periodic, and fair merit increases can boost employee motivation, productivity, and retention, thereby setting the groundwork for a vibrant company culture. A company that recognizes and rewards employee achievements and quality performances through merit increases shows that it values its employees and their contributions. This reward system, when incorporated into a holistic approach towards employee well-being and success, can help keep employees engaged and excited to contribute to company success.