Decoding Merit Cycles: Top-Down vs. Bottoms-Up

Finding the right approach to merit cycles for your organization

One of the biggest pain points for our customers at CandorIQ is the merit cycle. They’re a lot of work, but they’re also absolutely critical to a successful compensation and total rewards strategy. These periodic evaluations—occurring annually, semi-annually, or more frequently—ensure that employees are rewarded for their work and that their incentives align with company goals. 

Why do I (and other executives) think merit cycles are so important?

I’ll give you four reasons: Career growth, rewarding good work, aligning to company goals, and retaining talent. 

And merit cycles provide org-level structure to activating and monitoring these goals: Merit cycles encourage employees to grow within an organization; this is often by way or promotion and/or incentive for good performance; because this process is systematic, leadership is able to ensure it’s aligned with company goals (both budgetary and otherwise). And the end result is better achieving those company goals while keeping top talent happy.

For example: If your organization has plans for a big product push in Q4 and you have merit cycles scheduled for Q3, it might make sense to use that merit cycle to promote, rebuild, and reward your product team accordingly. Directly tying company objectives to the goals of rewarding good work, encouraging career growth, and retaining talent.

Determining the right approach for your organization

The process for designing your merit cycles (or any employee reviews for that matter) isn’t, and shouldn’t be, cookie-cutter. And sometimes those changes do need to happen ad hoc outside a merit cycle (making note to myself for a future proactive vs continuous change blog post….). Customers and HR leaders often ask me whether they should do merit cycles Top-Down or Bottoms-Up—or maybe somewhere in the middle. In a top-down approach, HR makes decisions and communicates them to managers, while in a bottoms-up approach, managers make decisions that are then approved by HR. 

There is no one right answer, but below are some factors to consider:

• Company size
• Departmental needs
• Geographical considerations
• Maturity of the organization

For example, a younger company might have less experienced managers that need more training and guidance on merit cycle best practices. Whereas a more established company will likely have managers who’ve been with the organization for years and their process could be more bottoms-up. 

Regardless of a company’s maturity, compensation can still vary significantly based on geography, department, etc. And those needs should play a role in how you structure your merit cycles (maybe one department has a slightly different approach than another because the managers are more tenured, or another team is fully distributed vs yet another that’s all based in the same city).

Each approach has its pros and cons. A top-down approach can ensure consistency and fairness across the organization, as HR can apply standardized criteria. On the other hand, a bottoms-up approach can provide managers with more flexibility to tailor compensation decisions based on individual performance and team dynamics.

CandorIQ offers the best of both worlds: support for both top-down and bottoms-up approaches, as well as a mix of the two (i.e. allowing bottoms-up with guidelines from HR or only involving specific executives or leaders, but not all managers). Our platform's flexibility allows organizations to choose the approach that best suits their needs. Features like approval workflows, our collaboration capabilities, audit capabilities to track history of comp changes and by whom, and reporting functionalities empower organizations to streamline their merit cycles and ensure transparency and fairness in compensation decisions.

If you were hoping for a black and white resolution, sorry to say this isn’t it. If I had to choose the dream scenario, it’s to empower your managers to do it with the right levels of guidance and education. Giving them the tools to conduct merit cycles fairly, quickly, and with budget and the whole org in mind. But that’s hard to get to since there’s no one-size-fits-all approach to merit cycles—it really is a journey. We’ve built CandorIQ to be flexible, able to play different roles as companies mature and progress in that journey.

We’re standing by ready to help you determine the right approach for your team.

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