A merit increase is a salary raise based on an individual’s performance, distinguishing it from general pay raises adjusted for inflation or tenure.
Merit increases are a cornerstone of modern compensation strategies. They reward performance, drive productivity, and help organizations retain top talent. But the process isn’t as straightforward as giving raises—getting it right requires thoughtful planning, clear communication, and a commitment to fairness.
Projections for 2026 show that companies plan to hold merit increase percentages in their budget steady at 3.2 percent, just enough to keep up with inflation. This lower-than-past-years number points to the challenges in managing perception and fairness, which directly influence whether merit-based systems achieve their goals.
Well-managed merit increases can drive engagement and strengthen trust between team members and their organizations. This article explores how organizations can design and implement merit increases that benefit both people and businesses. Let’s look at the strategies, trends, and evidence shaping merit pay today.
Key insights
Alternatives to merit increases include bonuses, promotions, incentive pay, stock options, and skill-based pay, which might better align with certain business objectives
A merit increase is a salary raise based on an individual’s performance and achievements, distinguishing it from general pay raises adjusted for inflation or tenure
Organizations use merit increases to recognize high performers, enhance morale, and maintain a competitive advantage in attracting and retaining talent
The typical merit increase is around three percent of a person’s salary, but it can vary between 1 and 10 percent depending on performance and industry norms
HR leaders establish transparent criteria for merit increases using performance reviews and a merit matrix to ensure fairness
While merit increases encourage excellence, they can introduce bias and budget constraints if HR teams don’t manage them carefully
Defining a merit increase (or merit raise)
A merit increase is a salary raise that companies offer team members for outstanding work achievement or performance. Depending on the industry and company, management may provide merit increases annually or after the successful completion of a project.
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 an organization’s salaries compete and align with the cost of living. While it’s acceptable for people to ask for a raise if they think their company underpays them, raises aren’t necessarily performance-based.
Merit increases, on the other hand, directly reward work performance. Businesses offer merit increases to highly valuable workers in specific positions to encourage and show appreciation for productivity and accomplishments.
Benefits of merit increases
Merit increases offer several clear advantages, including:
- Recognizing exceptional performance: Merit increases tangibly reward team members for their outstanding work and significant contributions to company goals
- Boosting productivity and morale: Acknowledging high performers can inspire all team members to improve their performance and create a productive, goal-oriented company culture
- Creating a competitive advantage: In a competitive job market, merit increases can attract high-caliber talent looking for organizations that recognize hard work
- Encouraging people to learn new skills: Tying compensation to performance motivates team members to improve their skills and enhance their value
A well-designed and effective merit increase program can boost retention and engagement. When people see a clear link between strong performance and higher pay, recognition feels timely, fair, and meaningful. Merit increases also reinforce a simple message: “Thank you. We appreciate your contribution.”
Keeping high-performing team members engaged supports continuity across the business. Strong retention also means HR teams can spend less time backfilling roles and more time helping people grow.
What is a standard merit increase?
The average merit increase is about three percent of a person’s current salary. Depending on the person’s performance and value to the company, merit increases range anywhere from one percent for lower performers to 10 percent for top-tier professionals.
Merit increase practices vary across industries and depend on economic conditions, labor demand, and organizational priorities. According to Mercer’s latest US Compensation Planning Survey, projected 2026 merit increase budgets differ by sector:
- High tech: 3.4 percent
- Insurance/Reinsurance: 3.3 percent
- Healthcare services: 2.9 percent
- Retail and wholesale: 2.9 percent
Awareness of these trends can help HR professionals design competitive and equitable merit increase programs within their respective industries.
Understanding how companies treat merit increases is also important for job seekers. Prospective new joiners can address this topic during the interview process to gauge whether a company’s annual compensation policies match their expectations and needs.
Factors impacting merit increases
Before offering merit increases, go through a process of establishing criteria, evaluating performance reviews, and having executives review each candidate. When determining whether to award merit increases and how much to give, consider:
- Performance: People who exceed their goals or make outstanding contributions often receive higher merit increases.
- Budget: Companies typically set a budget for merit increases based on revenue, economic conditions, and other financial rewards.
- Roles and responsibilities: Professionals in roles that drive core business objectives or include leadership duties may receive higher adjustments.
- Industry trends and market competitiveness: Companies adjust merit increases to meet or exceed industry standards. This keeps compensation packages in line with external expectations.
- Seniority and tenure: A team member’s tenure or seniority can impact a merit raise if they’ve consistently contributed to the company over a long period.
How to calculate a merit increase
After you determine your merit increase percentage, you can calculate the merit increase amount using this formula:
New salary = current salary × (1 + increase rate)
Merit increase example
To understand how to calculate a merit increase, let’s look at an example. Say you offer a seven percent merit increase to someone who currently earns $60,000.
$60,000 × 0.07 = $4,200
New annual salary = $64,200
To keep a merit increase 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. This can inform and clarify options during a salary review.
Sample merit increase matrix
A sample merit increase matrix gives managers a clear starting point for pay decisions. Most organizations pair performance ratings with team members’ salary range position, which helps reward strong results while keeping compensation fair and consistent.
Here’s a simple example:
A merit increase matrix supports better calibration across managers and departments. HR leaders can use one to review recommendations, guide compensation conversations clearly, and keep each merit increase aligned with performance, internal equity, and budget.
How to design and implement a merit increase process
Here’s how to create a merit increase process that benefits both your team and your organization.
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1. Design a compensation philosophy
Adhere to an official compensation plan to keep your merit increases standard and consistent. A study by Mercer notes that “While pay philosophies reflect differences in pay practices, they may also reflect differences in compensation review processes and unexplained pay gaps.” A written compensation philosophy keeps a company from veering off course, ensuring that every merit increase awarded strengthens the company in return.
2. Determine if merit increases will work
If you’re looking to show appreciation for a team member, a merit increase can be effective. But while valuable, they aren’t the solution for every organizational challenge.
For example, if your goal is to boost retention rates or tackle engagement issues, consider other factors too. Are people supported with the resources they need? Do their roles offer flexibility? Is the culture inclusive and encouraging?
Answer these questions to determine whether a merit increase will address the underlying issues or if priority should go to other improvements first. Establishing a strong foundation ensures that merit increases—when given—will have the most impact.
3. Choose a merit matrix
HR leaders and compensation managers can collaborate to determine which merit matrix fits their business. They can ask:
- Should the matrix focus solely on performance or factor in an individual’s position within their pay range?
- What percent increases are feasible within the company budget?
- Should higher performers receive a larger increase than others, or should merit increases be the same across the board?
HR leaders should consider what message the merit matrix system conveys to their people. For example, offering top-performers a higher merit increase percentage than others may inspire others to improve their work ethic.
4. Manage merit increases with HR tech
HR leaders can use HR tech to centralize performance ratings, pay ranges, budgets, and approval steps. A shared system keeps recommendations organized, supports consistency across teams, and gives managers clear context before they make a decision.
HR tech also helps leaders review trends across departments and track progress throughout the merit cycle. With better visibility, teams can move faster, stay aligned, and communicate merit increases with confidence.
5. Determine who qualifies for a merit increase
First, decide which roles qualify for a merit increase. Identify which positions and people in your company can significantly impact your business’s success and evaluate how difficult it is to find someone to replace that person or fill that role.
Bain & Company uses the example of restaurant prep cooks, where top performers are about two or three times more productive than the baseline. In this case, though you may not want to lose a top restaurant prep cook, it’s likely easier to find a replacement for them than it would be for a global law firm to find a top-performing trial lawyer. Consider these types of role specifics as you note your qualifications.
Once you’ve chosen the roles, incorporate a dynamic performance review system to evaluate the team members currently in those positions. Based on the performance evaluation data, you can develop challenging yet attainable objectives that qualify those people for a merit increase. Make sure the criteria are realistic: You want the requirements to spark hard work while still respecting work-life balance.
6. Make the criteria accessible to everyone
Communicate the merit increase criteria by including them in the employee handbook and explaining them to managers. This gives your people a level playing field where everybody knows which benchmarks qualify them for a boost. In theory, the more people who qualify for a merit increase, the better. With the right matrix, increased revenue will counterbalance the rise in gross wages.
7. Plan timing around merit increases
Plan merit increases around performance reviews, budget cycles, and key business milestones. 74 percent of workers receive a performance review annually or less often. Whatever duration you choose, a clear timeline gives managers enough space to assess performance, discuss recommendations, and align decisions with leadership and finance.
Many organizations review merit increases annually, while others leave room for off-cycle increases after exceptional work or a major contribution. Whatever cadence fits your business, communicate it early so people know when reviews happen and how decisions connect to the broader compensation plan.
8. Assess performance objectively to prevent bias
Use a combination of regular performance reviews, feedback on leadership and teamwork, and analytics tools to minimize bias and create a more informed perspective. This data-driven approach reflects measurable contributions while keeping the process transparent and motivating.
<< Download these free performance review templates >>
9. Train and prepare managers
Managers shape how people experience a merit increase process, so preparation matters. Train managers to use the merit matrix, evaluate performance against clear criteria, document recommendations, and explain decisions with clarity and respect.
Practice conversations before the merit cycle begins. When managers know how to discuss pay, performance, growth, and next steps, the process feels more consistent and more supportive for everyone.
10. Communicate the merit increases
Communicate when, why, and how you’re awarding the merit increase so team members understand the process and value of their contributions:
- When? HR leaders can provide merit increases throughout the year so that every time someone reaches a set goal, HR can reward them for their performance with a competitive, budgeted merit increase that drives engagement and productivity
- Why? Refer back to your merit matrix and explain why your team member qualified for a merit increase
- How? Award a merit increase either face-to-face or through a video call if you’re a remote team
Merit-based pay challenges
Before finalizing your merit-based compensation strategy, consider:
- Potential for bias: Without clear criteria, merit-based pay can unintentionally favor certain groups and affect morale.
- Impact on non-fiscal benefits: Merit pay shouldn’t be an organization’s only retention strategy. Consider other benefits your people care about, like career development opportunities, a great work-life balance, and flexible work schedules.
- Budgetary constraints: Frequent or large merit increases can strain budgets, particularly for organizations with limited resources.
How to measure the impact of merit increases
Merit increases can raise pay and expectations at the same time. To see whether your program works, track a focused set of outcomes before and after each review cycle and compare results across teams, levels, and tenure groups.
Retention
Start with retention. In May 2025, 51 percent of workers were actively seeking a new job, and merit increases may help retain some of that talent at your organization. Compare 6–12 month retention rates for people who received a merit increase with those in similar roles, tenure, and performance bands to understand how compensation decisions impact outcomes. Then, break down the data by manager and other contextual factors to identify where patterns emerge.
A stronger retention rate among high performers may signal that merit increases help valuable colleagues stay longer. If retention rises in one function but stays flat in another, HR leaders can review manager practices, career paths, and pay positioning for a clearer picture.
Engagement
Review engagement data tied to recognition, motivation, trust in leadership, and intent to stay. Pulse surveys before and after a merit cycle can show whether people connect the process with fairness and appreciation.
You can also look at participation in goal-setting, one-on-one meetings, and development plans. When people understand how performance links to pay, engagement often rises because the process feels clear and worthwhile.
Satisfaction
Satisfaction shows whether the experience matched the intent. Engagement is a key indicator for satisfaction, and its recent decline suggests team member satisfaction may be slipping. Keeping a close eye on the trends in your workplace can help you beat this trend. Use survey questions, manager feedback, and compensation comments to learn whether people viewed the increase as fair, meaningful, and aligned with their contributions.
Then compare results across performance bands, salary bands, and departments. If top performers report flat satisfaction after a merit cycle, companies may choose to increase levels or managers may call for another review.
<< Build a stronger, more engaged workforce. Start your employee satisfaction survey today >>
Performance correlation analysis
A merit increase program works best when higher increases align with stronger results. Compare increase levels with performance ratings, goal attainment, promotion readiness, and output across the next review period.
Performance analysis can also reveal where calibration varies too much across teams. If colleagues with similar results receive very different increases, HR leaders can revisit rating standards, manager training, and merit matrix design.
Cost-benefit evaluation
Finally, compare program cost with measurable outcomes. Review compensation spend alongside retention gains, hiring volume, time-to-productivity for replacement roles, and team performance trends.
A cost-benefit view gives leaders a fuller picture than budget numbers alone. When merit increases help keep high-performing people, reduce replacement activity, and support stronger business results, the program likely delivers value.
Alternatives to merit increases
If a merit increase isn’t the best fit, you can use other compensation strategies to reward and motivate your people.
Cost of living adjustment (COLA)
COLAs are periodic pay adjustments that help keep wages in line with inflation and rising living costs. Unlike merit increases, these usually apply across the board rather than reflect individual performance.
Promotion
A promotion almost always includes a change in role or responsibilities, often accompanied by a pay increase to reflect the higher expectations of the new position. While merit increases recognize the quality of someone’s current performance, promotions signal readiness for greater responsibility or a new career phase.
Incentive pay
Incentive pay is a variable or one-time payment for when your people achieve specific, measurable goals. Payments tie into specific projects or short-term outcomes, such as quarterly sales targets or the completion of a major initiative. This motivates team members toward immediate objectives.
Unlike merit pay, incentive pay doesn’t alter base salary and doesn’t occur each period—it’s only for when the team member meets their set goals.
Equity or stock options
Equity and stock options are forms of compensation that give team members a stake in the company, often allowing them to purchase shares at a set price after a certain period.
Equity compensation creates a sense of ownership and aligns a colleague’s interests with the company’s success. This is often especially appealing in startups and high-growth organizations.
Skill-based increases
Skill-based pay rewards team members for learning new tools, technology, or methods that add value to their roles. These increases support continuous learning and help people expand their contributions to the team.
Bonuses
A bonus is a recurring reward based on company performance, department results, and an individual’s performance. It’s often planned and expected, like an end-of-year bonus or holiday gift.
Compared to incentive bonuses, which are tied to specific achievements, standard bonuses reward overall contributions. They can be a percentage of a salary (a 15% bonus) or a set amount (a $15,000 bonus).
Peanut butter raises
Peanut butter raises give similar pay increases to most people rather than differentiating based on performance. The approach is simple: More people receive a modest increase, which can help organizations maintain consistency and plan compensation budgets more easily.
For HR leaders, peanut butter raises can work well when broad market alignment is the goal. But when every increase looks similar, top performers may feel less recognized, which can weaken the connection between stronger performance and higher pay.
Include merit increases in your modern HR strategy
Well-implemented merit increases are great tools for HR professionals to boost retention and productivity. If you plan a fair, sustainable merit increase process and communicate it transparently, you can retain top performers, raise your revenue, and keep your team enthusiastic and engaged.
<< Explore proven benchmarks and practical strategies to plan merit increases with confidence >>
Merit increase FAQs
What is a good merit increase?
A good merit increase reflects someone’s performance and contributions. It often ranges between three and five percent of their current salary. High-performing professionals or those with exceptional results may receive merit increases of up to ten percent.
Who should get a merit increase?
Merit increases should reflect impact, not apply automatically to everyone.
Not every team member performs at the same level, and applying an additional three to five percent increase year after year can significantly raise long-term compensation costs.
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.
Is a merit increase permanent?
Yes, merit increases are generally a permanent adjustment to a person’s base salary. Unlike temporary bonuses, merit increases reflect a long-term recognition of value and commitment to rewarding outstanding performance.
What is a merit increase of five percent?
A five percent merit increase is a significant boost for top performers who exceed expectations and make a substantial impact on business goals. A five percent adjustment of the total previous salary shows an organization’s dedication to rewarding excellence and encouraging a goal-oriented culture.
How often should you give merit raises?
Most organizations give merit raises once a year during the annual performance and compensation review cycle. A regular cadence gives managers, HR leaders, and finance teams a clear timeline and helps people understand when pay decisions happen.
In certain cases, companies also offer off-cycle merit raises after exceptional performance, a major project, or a meaningful expansion in responsibilities. The right timing depends on your compensation philosophy, budget, and business goals, but clear communication makes the process easier to understand and trust.
