What is a merit increase?

A merit increase is a salary raise companies offer professionals for outstanding work achievements or performance. Depending on the industry and company, merit increases may be provided annually or based on the projects completed.

Merit increase vs. pay raise

Typically, companies offer pay raises annually or biannually for the entire workforce, department, or specific positions. Pay raises ensure that a company’s salaries are competitive and align with the cost of living. While it’s completely acceptable for people to ask for a raise if they think they’re underpaid, raises aren’t necessarily connected to performance. 

Merit increases, on the other hand, are directly related to work performance. Businesses offer merit increases to highly valuable professionals in specific positions to reward, encourage, and show appreciation for productivity and accomplishments.

What is a standard merit increase?

The average merit increase stands at about 3 percent of a person’s current salary. Depending on the person’s performance and value to the company, merit increases typically range anywhere from 1 percent for lower performers to 10 percent for high-performance professionals.

Understanding how companies treat merit increases is important. Professionals should address this topic specifically during the interview process to properly gauge whether a company’s annual compensation policies match their expectations and needs.

Why do companies give merit increases?

Companies incorporate merit increases to recognize top performers’ achievements and dedication. Merit increases can also spur increased workplace productivity by igniting everyone’s drive to improve work quality. Ultimately, by providing an incentive to elevate work performance, the company can build a productive, goal-oriented work culture and increase its bottom line.

Why should HR leaders care about merit increases?

While merit increases definitely aren’t the only way to retain talent, they can help. By rewarding high-performers with extra compensation, the company demonstrates that it values them and their contributions. Thus, merit increases are another way to say “thank you, we appreciate your service.” 

A well-designed and effective merit increase program that rewards deserving professionals can boost employee retention, productivity, and engagement. 

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

Who should get a merit increase?

Merit increases aren’t for everyone, and that’s okay.

Not everyone is a high-performance worker. Furthermore, paying an extra 3-5 percent compensation increase over several years or decades can be costly. 

That’s why merit increases are intended only for professionals with outstanding achievements who directly drive business goals.   

Make sure you offer merit increases to people only after undergoing a process of establishing merit increase criteria, evaluating performance reviews, and having executives review each candidate.

How do you calculate a merit increase?

To understand how to calculate a merit increase, let’s take a look at an example. 

Say you offer a 3 percent merit increase to someone who currently earns $80,000 annually and receives a monthly paycheck. 

Current salary x merit increase percent = annual raise

80,000 x .03 = 2,400 annual raise

New salary/amount of paychecks per year = new monthly salary

82,400 / 12= $6,866.66To ensure that the merit increase is within budget and the position’s salary range, HR leaders can collaborate with compensation managers to build a merit matrix–an easy-to-read grid that displays accurate calculations and competitive salary increases.

What can HR leaders do to implement merit increases?

HR leaders can create a merit increase system that promotes employee engagement, retention, and productivity using these guidelines: 

  • Look at other determining factors. Because merit increases aren’t the only components involved in driving engagement and retention, consider other central HR factors first: Do people have what they need to work comfortably? Does the position offer work flexibility? Is the company culture inclusive and accepting of thought diversity? Are there appropriate learning and development opportunities? Once you’ve analyzed the other core factors, you can home in on the merit increase.
  • Determine what qualifies people for a merit increase. To identify which positions and people are vital to business success, evaluate how difficult it is to find someone to replace that person or fill that role. How much does this position or person impact the company’s business goals and strategy? When assessing peoples’ professional worth, rely on data from several channels such as frequent performance reviews, 360-degree reviews, and talent analytics. 
  • Define the criteria. Make sure the criteria are realistic. You want the requirements to spark hard work while still respecting work-life balance. The criteria ideally should stimulate motivation rather than disappointment and resentment.
  • Make the criteria accessible to everyone. Communicate the merit increase criteria by including it in the employee handbook and explaining it to managers. This way, professionals can understand which benchmarks they need to reach to qualify.
  • Offer frequent merit increases. HR leaders can provide merit increases throughout the year so that every time an employee reaches a set goal, HR can reward them for their performance with a competitive, budgeted merit increase that drives engagement and productivity.
  • Take a holistic approach. Relying on merit increases alone won’t create the desired results of increased employee engagement, productivity, and retention. However, implementing merit increases into a company culture that respects and appreciates its people, offers competitive base salaries, and boasts managers who can coach and mentor their people is the foundation of business success.

Why should merit increases be part of modern HR strategy?

Merit increases are great tools HR professionals can use to boost retention and productivity. A company that recognizes and rewards peoples’ achievements and performances shows that it appreciates its people and their contributions. When incorporated into a comprehensive approach towards employee wellbeing, merit increases can help keep professionals enthusiastic and engaged.