What is a Merit Increase? What Does It Mean?

A merit increase is a key concept that plays a crucial role in rewarding employees for their performance. But what exactly is a merit increase, and why is it important? This blog will explore the meaning of a merit increase, why employees might receive one, the benefits for businesses, and how companies typically implement these increases.

What is a Merit Increase?

A merit increase, also known as merit-based pay, is a salary raise given to an employee as a reward for their performance. Unlike across-the-board raises or cost-of-living adjustments, which are often given to all employees, a merit increase is typically tied to individual performance, rewarding those who have excelled in their roles. This increase is often provided in the form of a cash raise, directly reflecting the employee's contributions to the company.

Why Might Someone Get a Pay Increase?

There are several reasons an employee might receive a merit increase:

• Market Adjustment: As the job market evolves, it's essential for companies to stay competitive. Merit increases can help ensure that employees are being paid fairly compared to industry standards, which is vital for retaining top talent.
• Performance Increase: A job well done might not always justify a promotion, but can still—and should—be acknowledged. Usually smaller than the increase you’d receive with a promotion, merit increases for meeting or exceeding performance expectations are common.
• Promotion or Change in Responsibility: When an employee takes on new responsibilities or is promoted to a higher position, they may receive a pay increase. While this is often a more significant jump than a typical merit increase, it reflects the employee's expanded role within the company.
• Profit Sharing or Ownership Sharing: Companies may also provide merit increases as part of profit-sharing or ownership-sharing programs. These increases not only reward employees for their performance but also align their interests with the company's financial success.

Reasons Why It’s Smart for Businesses to Give Merit Increases

Everyone likes making more money, so it goes without saying that employees tend to like merit increases, but implementing merit increases can also be a strategic move for businesses. Here’s why:

• Aligning with Business Objectives: Merit increases link pay to performance, creating a direct connection between an employee's efforts and their compensation. This alignment encourages high performance, ensuring that employees are working towards the company's goals.
• Motivating Employees: When employees know that their hard work will be rewarded, they are more likely to continue outperforming. Merit increases serve as positive reinforcement, motivating employees to maintain or even improve their performance.
• Improving Retention: By rewarding top performers, companies show that they value their employees and have their best interests at heart. This can lead to higher job satisfaction and lower turnover rates.

A Standard Process for Giving Merit Increases

Merit increases are typically part of a structured process that looks different from organization to organization. As your business changes, your merit process will likely change with it. But generally speaking, here’s an example of how it works:

1. Performance Evaluations: The first step involves updating performance evaluations to assess how well employees have met or exceeded their goals. 
2. Budget Considerations: Next, companies must figure out their budget for merit increases. This ensures that the increases are financially sustainable. (Note that sometimes the budget is determined before or in parallel to the performance evaluations.)
3. Calibrating Merit Decisions: To maintain fairness, companies often calibrate merit decisions across employees. This process ensures that merit increases are consistent and based on objective criteria.
4. Communication: Finally, once decisions are made, it’s crucial to communicate the increases to employees clearly and transparently. 

CandorIQ can help automate and manage these processes, making it easier for companies to implement merit increases effectively.

How Often Should You Do Merit Increases?

The frequency of merit increases can vary depending on the company and its budget. It’s recommended to continuously monitor and track performance to identify when merit increases are needed. Typically, merit increases happen on a scheduled basis, such as annually or semi-annually, across the organization. However, they can also be done on a one-off basis when necessary, such as to retain a valuable employee who might be considering leaving or to recognize an employee for a particularly impactful contribution to the business.

Merit increases are a standard and important business practice. When done right, they can help you attract and retain top talent while working towards business goals. 

Ready to take control of your merit cycles? CandorIQ can help you stay organized and make strategic decisions for your merit increases. Schedule a call with us to learn how.