Merit Increase

The dynamic effort to attract and retain top talents include giving performance-based compensation or increase. In this article, we’ll discuss merit increase, its difference with other compensations, and its importance. 

What is a Merit Increase?

A merit increase is a salary adjustment granted to an employee based on their individual performance, contributions, and overall merit within the organisation. 

Unlike across-the-board salary hikes, which are usually uniform for all employees, merit increases are personalised and reflect an individual's achievements and impact on the company. This form of recognition is often tied to performance evaluations, where employees receive feedback on their work, set goals, and demonstrate progress. A merit salary increase may also be granted after the employee provides a valuable contribution to a specific project. 

Example:

The annual performance review determined that Sarah had an outstanding performance. According to company policy, this grants her a merit increase of 5%. Sarah’s annual salary is $60,000 - the merit increase will permanently raise it to $63,000. It also becomes the new baseline for calculating future raises and bonuses. 

How is a Merit Increase Different from a Pay Raise?

A pay raise generally refers to an across-the-board increase in salaries for all employees, often influenced by external factors such as inflation or market trends. On the other hand, a merit increase is specifically linked to an employee's performance and individual merit, acknowledging their efforts and accomplishments within the organisation.

In essence, a pay raise is more uniform and less personalised, whereas a merit increase reflects a more nuanced approach to compensation, recognising and rewarding employees based on their unique contributions.

Merit Increase vs Bonus

While both are forms of additional compensation, they serve distinct purposes. A merit increase is a permanent adjustment to an employee's base salary. In contrast, a bonus is typically a one-time, lump-sum payment provided as a reward for exceptional achievements, often unrelated to the regular salary structure.

While merit increases contribute to long-term employee satisfaction and retention, bonuses serve as immediate recognition for extraordinary efforts or achievements that go above and beyond regular expectations. Striking a balance between merit increases and bonuses can be a strategic approach for organisations aiming to motivate and retain their workforce.

Is There a Standard Merit Increase?

There is no universal standard for merit increases. The percentage or amount of a merit increase varies across industries, companies, and even departments. Organisations commonly establish merit increase guidelines based on factors like performance evaluations, market benchmarks, and budgetary considerations.

However, it’s common for many companies to offer anywhere from 3% to over 5% of the employee’s annual salary. 

Why is a Merit Increase Important?

The importance of merit increases extends beyond monetary recognition. They serve as powerful tools for employee motivation, engagement, and retention. When employees see a direct correlation between their efforts and tangible rewards, they are more likely to remain committed and invested in their work.

Moreover, merit increases contribute to a culture of fairness and transparency within the organisation. Employees are motivated to excel when they believe that their hard work is acknowledged and rewarded appropriately. This, in turn, fosters a positive work environment and encourages a continuous cycle of improvement and achievement.

How Do Companies Develop a Merit Increase Matrix or Policy?

Besides outlining the objective and aligning with the business strategy, the following steps are also necessary to develop a merit increase matrix or policy:

• Define the criteria for awarding merit increases. 
• Develop a robust performance evaluation process.  
• Determine the budget allocation for merit increases.
• Craft a merit increase matrix that includes performance ratings or scores along one axis and corresponding merit increase percentages along the other. Please see a simple example below. 
• Benchmark against industry and market data to ensure that merit increases are competitive.  
• Communicate the merit increase policy clearly to employees.

Merit Increase Example:

Of course, employers must not forget that the policy has to be reviewed and updated from time to time, and it must comply with all the relevant laws.