What is a Merit Increase? Overview & 21 Facts

For many workers, there is no greater satisfaction than being acknowledged. In the past, workers who performed well were rewarded with words of praise or commendation. In recent years, however, the effort of top achievers has earned them a pay raise in the form of a merit rise.

In the United States, merit-based raises are a popular practice in the workplace. In 2020, the average budget for merit increases will be three percent of base pay. Depending on the company, this percentage might go as high as 5 or 10 percent.

This guide examines the merit increase notion and its significance. It is essential to grasp the distinctions between merit raises and other types of pay or pay increases, since they are distinct from other kinds of compensation or pay increases. We will examine eligibility and the workers most likely to be eligible for merit raises.

What is a Merit Increase?

A merit boost is an increase in an employee’s hourly income or annual salary based on his or her own performance. This is a substantial increase compared to a yearly company-wide rise or a cost-of-living adjustment.

What is a Merit Increase?

In addition, a merit increase may accompany a standard raise; that is, everyone in the organization may get a pay increase, but the additional percentage may vary according on job performance.

6 reasons why merit increases are important

It is advantageous for businesses to establish a system that correlates effort with monetary compensation. It will help the employee as well as the company.

Among the benefits of merit increases are:

Track progress

When monetary incentives other than compensation are attached to a worker’s performance, the employer pays heightened attention to individual output.

This may be observed when a company establishes monthly, quarterly, or yearly objectives. Employers will reward workers who achieve these objectives.

Clarify company objectives

By associating rewards with specific outcomes, the business communicates its most important objectives. There is no misunderstanding over what workers should prioritize and how their efforts will affect the firm and their own profits.

Encourage productivity in the workplace

When employees are aware that their direct efforts may result in a pay increase, there is a greater likelihood that they will align their efforts with corporate goals.

In the past, workers may have had a mediocre performance throughout the month if they were not rewarded. However, the idea of a merit-based raise might motivate employees to work harder to achieve organizational objectives.

Improve retention

In an environment where workers are recognized for their accomplishments beyond monetary compensation, worker turnover is likely to be decreased.

A work environment where employees feel appreciated will retain their employees. The idea that direct effort will result in further advantages is certain to increase employee retention. In addition, businesses gain their accessibility to elite personnel.

Emphasize business objectives

Increases based on merit are an efficient method of showing the desired level of performance among workers. By establishing a benchmark and recognizing employee performance that surpasses the norm, organizations may demonstrate to workers that their efforts are valued.

When employees are aware of what their employers want and see the benefits of delivering it, merit pay increases for certain employees may motivate others to perform at a better level, regardless of whether they get merit pay increases.

Improve company standards

Increases in merit pay are contingent on the measures specified by firm management. This implies that organizations and human resource professionals that oversee merit-based programs will always have a criterion for recognizing excellent and poor performance.

Since merit raise incentives promote outstanding performance, the likelihood of workers adhering to and exceeding fundamental criteria improves. Establishing criteria ensures there is no confusion with staff and helps workers better grasp what a merit increase entails so that they may aim for one.

Forms of merit pay increases

In the majority of situations, merit-based pay increases take the shape of bonuses or increases in base salary, but they may also result in promotions. These employee incentive programs help firms grow a better workforce via competition, resulting in increased innovation and output.

What is a Merit Increase?

In addition to enhancing employee retention, merit-based programs may create a tough environment that fosters performance by promoting a culture of competitiveness.

Best practices for managers

Planning and execution are crucial to the success of merit raise initiatives. Here are a few excellent practices that managers may apply when employing merit pay increases to enhance employee performance:

Develop a clear, consistent and reliable policy

A robust merit pay increase policy must be dependable and consistent, since it serves as a guide for all workers and as the foundation for management to give merit pay. A policy that is ambiguous or difficult to comprehend may not provide a trustworthy blueprint for the merit-based system.

To retain employer-employee trust, workers and management should be fully informed of all criteria utilized in merit-based pay awards. HR experts should conduct yearly reviews to assess or reassess an employee’s performance and determine whether they deserved a future merit-based pay raise.

Get advice from the people involved

When designing stronger policies for merit-based pay increases, it is crucial to get the input of other departments involved. This enables human resource specialists to build a reliable and methodical process for assessing performance and awarding the associated rewards.

To do this, employ readily quantifiable measures when developing and implementing a merit-based pay rise strategy. Ensure that all departments are informed of any modifications to the metrics used to calculate merit-based increases, and that they communicate these modifications to all affected workers.

Train management and keep them accountable

Your company’s merit raise policy depends heavily on management’s support of the workers in order to be successful. To ensure the effectiveness of the policy, every member of management connected with the program must get training. Holding them responsible for the outcome of the merit raise encourages accountability for the performance of their personnel and provides them credit for favorable outcomes.

To do this, employ readily quantifiable measures when developing and implementing a merit-based pay rise strategy. Ensure that all departments are informed of any modifications to the metrics used to calculate merit-based increases, and that they communicate these modifications to all affected workers.

Listen to your employees’ feedback

One of the most significant strategies for promoting professional growth is employee feedback on merit-based programs. Listening to what workers have to say ensures that all areas of an organization’s operations are operating smoothly. It enlightens you as to which policies are effective and which require modification.

An open-door policy and chances for anonymous feedback allow employees to provide HR personnel with their thoughts and concerns with ease. Nevertheless, there are more methods to get meaningful employee input on your merit-based pay raise schemes.

You may, for instance, conduct exit interviews with departing workers to determine what they like and hate about the present merit-based systems. This useful information may also aid your company in lowering staff turnover due to comparable factors.

Keep a consistent evaluation of the merit increase system

Regularly assess the merit increase system and modify it as needed. Continual grooming and pruning enables HR managers to simplify procedures and provide clarity to merit-based metrics as they go, ensuring that the system adapts to the many interests and characteristics of the workforce.

This also assists your business in keeping track of what works and what doesn’t, as well as the context of triumphs and failures. Analyzing what worked and what did not may assist in enhancing successful merit pay raise policies and preventing recurrences of bad consequences resulting from failing ones.

Is a merit increase the same as a promotion?

No, in brief. A merit rise is a reward for excellent performance, but it does not imply a promotion for the employee. With a merit rise, the employee’s income increases, but their position stays unchanged.

Consider a merit raise as a sign of acknowledgement and gratitude. Career progression is contingent upon promotion. This often entails expanded work duties, more contributions, and a new title.

Merit increase vs. pay raises

A merit increase is a sort of pay boost that is granted based on the performance of the employee. It is often used to recognize the top-performing personnel inside the organization. As a consequence, this might motivate workers to achieve corporate objectives by associating their efforts and accomplishments with wage increases.

What is a Merit Increase?

For instance, consider Joanna, a high-performing employee at a firm, who was able to accomplish and surpass the company’s targets for the year by 5 percent. Therefore, her work would be recognized in the merit-based wage raise. In contrast, Ashley in the same corporation would only get her usual income due to her inability to meet or surpass the company’s annual objectives.

A pay rise, on the other hand, is an increase in an employee’s remuneration unrelated to their performance. Consequently, a pay raise is often an increase in compensation that is normally distributed across the board. Consequently, if Joanna and Ashley have the same job title and work for the same business, they will likely earn identical yearly wage raises.

Who should get a merit increase?

Despite being distinct from a promotion, merit increments are used to recognize excellent performance. Numerous firms and human resource (HR) specialists scrutinize personnel who thrive in their positions.

As previously stated, workers who get merit raises do not acquire additional duties. In addition to recognition and gratitude, it is essential to reward your personnel with merit raises.

When evaluating who should get a merit raise, the following elements should be considered:

  • The individual has a positive status and is doing well (as noted in the performance review)
  • Available cash for salary increases
  • Considered merit hikes have been suggested for workers by leadership.
  • The candidate for a merit raise falls within the wage range for the job.

How to get a merit increase

Increases based on merit are an excellent method to boost your income and receive a competitive compensation that rises with your expertise. However, there are other actions you may take to achieve a merit-based pay increase:

1. Read your employee handbook

If you want to get a merit raise, you must ensure that your company offers a merit increase program. Read the employee handbook or inquire with your boss regarding merit-based increases. Numerous companies offer defined rules for giving merit raises, which you may use to choose how to focus your time at work.

2. Understand your manager’s expectations

Managers are often responsible for determining who gets a merit raise and when they receive it. Contact your immediate supervisor and inquire about their unique requirements. This might help you determine how you compare to other workers and establish appropriate criteria for your own performance and conduct.

3. Review past feedback

Examine prior performance assessments and other feedback to get an objective perspective on whether you’re meeting expectations and where you might improve.

Create a strategy for matching your performance with these criteria after comparing your input to the merit increase recommendations. Your formal performance evaluations often have a direct bearing on merit raises, so pay particular attention to how your work relates to the standards of excellence.

4. Gather evidence of your success

Ensure that you document your successes and record instances in which you met or surpassed the standards for merit-based raises.

Advocate for your skills at performance reviews and highlight your successes so that your employer takes them into account when determining increases. Share your accomplishments with your boss and colleagues so that your eligibility for a raise based on merit is evident to those who make the choices.

5. Shadow top employees

Learn effective ways for achieving employer expectations and obtaining a merit rise by collaborating with high-performing workers. Long-term workers may also be able to provide light on the flexibility of raise criteria and how your company implements merit raises.

What is a Merit Increase?

Improving your abilities via shadowing enables you to apply what you’ve learned to the context of your employment and increases your likelihood of earning a merit rise in acknowledgment of your hard work.

6. Research competitor policies

If you work for a firm that seldom grants merit-based raises, you may want to investigate the policies of comparable organizations to see if you are getting raises at a lower rate than your peers.

This information may be used to persuade your company to implement a more competitive increase policy. You may also use the opportunity to seek employment with a company that offers superior perks and prospects for professional advancement.

Who can earn a merit increase?

Companies may choose who receives a merit rise based on a variety of criteria, but employee performance and productivity are often the most important.

You may be eligible for merit raises if you possess important abilities and use them to do outstanding work that contributes to the company’s revenue growth. Additionally, merit raises differ based on the requirements established by employers, budgetary constraints, and the average performance of your peers.

What is the average merit increase?

The average merit increase is around 3%.

Nonetheless, this figure is anticipated to alter by 2022.

The Great Resignation (or Great Reshuffle) has spawned a talent war. With a record number of people quitting their jobs, companies are doing all possible to keep their talent.

Experts anticipate that merit-based raises may reach as much as 5 percent. In fact, more than half of HR directors in the United States anticipate that their firms would boost the average merit rise to more than 5 percent, according to a study by Grant Thornton. In addition, a rising number of businesses are expanding employee eligibility for financial bonuses.

Depending on job role and department, merit raises differ. Some companies evaluate the contribution of certain divisions to the company’s objectives. Current wage (particularly in relation to the salary or compensation range) should also be considered.

Merit increase and cost of living adjustments

The passage of time is often accompanied with inflation, a continuous shift in prices. Inflation creates a rise in the price of products and services, a difference that might have an impact on the buying power of employees.

Cost-of-living adjustments (or colas) are implemented in response to this price rise. These adjustments relate to a wage increase to accommodate the rising cost of living. Colas may also be offered to keep staff who are considering relocating to a location with greater living expenses.

3 steps to calculate a merit increase

Incorporating merit increases into a business is a foolproof method for retaining employees and rewarding excellence. Observe the following procedures to appropriately model this system for a business:

Examine how the role impacts the business

While several factors contribute to the success of a firm, employers should evaluate the influence of merit hikes. Organizations employing merit raises should ensure that the merit increases contribute to the achievement of corporate goals.

This may include positions inside the organization that are difficult to fill. Similarly, positions whose failures might have a significant impact on the company’s success must be rewarded adequately.

Rewarding competence in these positions with merit incentives may lessen the risk of employee turnover and mistakes. In the end, this might increase the company’s productivity and profits.

Impartially grade performance

Examine a worker’s efforts in the workplace holistically, in addition to performance assessments.

What is a Merit Increase?

When evaluating merit raises, organizations should consider a number of these crucial factors:

  • A superior’s observations
  • Coworkers standing together
  • Attention to detail

Critically observe whether merit increases with improve efforts

High-performing staff may be retained and have their morale boosted by merit increases. However, if other elements are absent, this strategy may not be sufficient to maintain employee satisfaction.

Before adopting additional remuneration, the organization should assess the employee experience. Some additions include greater paid time off, an expansion of available perks, and improved flexibility.

If it is determined that a merit raise would enhance operations, the corporation may decide to give every employee the same merit bonus, say 3 percent. Alternately, employees with superior performance may get a 5 percent incentive, while those with average performance receive a 2 percent bonus.

In other instances, only the jobs with the highest performance that are most vital to the company’s operations would get a 5 percent rise. Everyone else will get a 2 percent rise in compensation. Every person in a vital position will get a 5 percent raise, regardless of their contribution to the company’s objectives, whenever feasible.

Last word on merit increases

Any firm would benefit from selecting the merit pool as the source for employee rewards.

Employers can enhance staff morale and productivity using accessible tools. Ultimately, enterprises will see an increase in income as a result of this system.

How do cost of living adjustments affect salary increases?

Cost of living adjustments (COLAs) are a wage increase that reflects the rise in the price of goods and services consumed by the average consumer.

The fact that COLAs and merit raises are unrelated to the two variables that drive wage increases, Market Price and Internal Value, may cause confusion. The cost-of-living adjustment (COLA) is a sort of pay boost that reflects inflation in the prices of goods and services. Consequently, this will impact the employee’s future compensation growth.

For example, if the yearly rate of inflation rises by 2 percent, it may be prudent to boost your workers’ salary by the same amount so they can continue to cover their essential living expenses.

Or, if an employee transfers to a new place with a higher cost of living, you may consider adjusting their salary to meet the market value of what they would be worth to another employer in the new area. It is an excellent method for preventing the employee from quitting your organization.

Choosing between COLA and merit increases

Consider utilizing the cost of living adjustment to revise an employee’s wage if he or she relocates to a different place for employment to account for the rise in basic living expenditures.

Alternatively, if the employee is doing really well, such as surpassing your organization’s objectives, you may want to consider rewarding them with a merit rise.

Consider offering the employee with both a cost-of-living adjustment and a merit raise if he or she relocates to a new place and exceeds business objectives.

Why do merit increases matter?

This is a step in the right direction in many instances (beyond adjustments for cost of living). Rewarding substandard work may result in mediocre outcomes, which can have a negative influence on staff morale. According to this HBR article by the former Chief Talent Officer of Netflix, when it comes to employee engagement, exceptional coworkers “outweigh everything else.”

Additionally, salary raises might motivate difficult-to-find top performers to remain with the organization for a longer duration. According to data conducted by Glassdoor, there is a high association between compensation and retention, which suggests that wage increases may be utilized to reward and retain individuals whose flight risk also presents a business risk.

Deciding who should get a merit increase: It’s tricky

When a great performer departs an organization, the indirect costs in the form of lost customer connections and hindered product innovation may be enormous. Bain & Company estimates that, across all job categories, “the greatest performers are around four times as productive as the average performers.” According to HR thought leader Dr. John Sullivan, a single top-performing programmer in a high-performing technology business would generate a staggering $48 million in additional value annually.

As a result, it is not unexpected that many firms are embracing performance-based pay cultures for merit raises. However, other experts have maintained that differential remuneration should not be the norm, but rather the exception.

It might be challenging to ascertain the effects of differentiation with adequate precision, dependability, and precision. Moreover, if retention is the objective, reasons other than remuneration may be influencing the departures of high-performing employees in key positions.

The good news is that, thanks to workforce analytics technology that offers granular insights from many systems, compensation teams can now decide the ideal amount for salary increases based on empirical evidence.

How to use people analytics to determine merit increases

Follow these steps to simulate various merit raise setups and determine the correct choice for your organization:

  • Determine how role-specific performance influences organizational outcomes
  • Assessing performance objectively and determining if merit increments will be effective
  • Model the increments

Step 1: Determine how role-specific performance impacts business results

It is essential to specify how the performance of various job categories contributes to the performance of the organization. This will assist in determining the precise nature of a justifiable disparity.

For example, according to study conducted by Bain & Company, for occupations requiring repetitive, transactional duties, top performers are often two to three times more productive than those with lower performance. Work that is highly specialized or creative is likely to have a difference of six or greater.

Identifying precisely what constitutes a crucial job is another essential effort. Ask the following questions:

  • How much do errors in this job cost?
  • How tough is it to replace this individual?
  • How integral is this function to the success of our company strategy?

This does not imply that you should rush out and, for example, offer a sixfold pay raise to everyone in a creative and vital function. It may not be feasible for your firm from a financial or staff morale standpoint, and it may not be essential. Here, segmentation and scenario modeling are useful.

 

Step 2: Objectively assess performance

Once the business-critical positions have been identified, the next step is to identify the people who are really driving performance. To identify objectively who the top performers are, go beyond performance assessments.

Humans form hasty judgements about other individuals using heuristics, or fast and dirty rules of thumb. A recent blunder by a salesman, for instance, might obscure an otherwise steady record of success.

For a reliable evaluation of performance, it is necessary to collect information from numerous sources. To get a complete, objective assessment of a person’s performance, it is necessary to integrate performance ratings with other data such as potential rating, tenure, and recognition awards. It is also possible to examine job-specific information, such as the number of units produced or sales transactions closed.

This is where a platform for people planning that integrates employee, performance, financial, and company data can be a tremendous asset. In the absence of data from many sources, determining who stands out from the crowd is susceptible to prejudice.

Step 3. Determine whether merit increases will work

Now you must address a crucial point that many pay teams overlook: whether merit raises will in fact boost employee retention.

Despite the fact that money is always a role in employee retention, there are several additional reasons why employees leave their jobs, including job insecurity, inadequate onboarding, workplace stress, and location.

Micron, one of our clients, discovered that a modification to job descriptions assisted in resolving a problem with resignations owing to job fit. Before devising a remedy, it is advisable to examine the issue first.

Predicting flight risk may include very complicated technology and methodologies, but in its simplest form, it is constructing a profile of former employees that can be used to detect similar traits in current workers.

Advanced “in-memory” programs make it simpler to execute individualized algorithms that aid in identifying flight risk. Data scientists have shown that this strategy is up to 17 times more precise than previous approaches.

Step 4. Model out the increases

Once you have determined that compensation raises would aid in the retention of a certain set of top performers, you should simulate various increase scenarios to establish their effect on your business. The objective is to retain the greatest number of individuals at the lowest expense. Beginning with three scenarios:

  • Scenario 1 is a baseline scenario in which everyone receives the same amount, a rise of 3%.
  • Scenario 2 presents a wider disparity, with a 5 percent boost for top achievers and a 2 percent gain for everyone else.
  • In this scenario, only important positions within the sector of top talent would get a 5 percent raise, while everyone else would receive a 2 percent boost. Alternately, a 5% boost might be given to all essential positions, regardless of performance.

Consider elements such as time-to-fill as you evaluate each situation. If the positions are crucial and the talent necessary to fill them is rare, a larger disparity may be needed.

If competition for these individuals on the market is less intense, you may probably get away with a lower difference. You may return to the situations and continue modifying them until you have created the optimal strategy.

What is a Merit Increase?

Merit pay differentiation finally becomes a reality

Differentiated compensation based on merit used to be a fine notion in principle. Now, as a result of advancements in analytics technology, it is also a sound practice. With a comprehensive approach to your people and business data, acquired in real-time from many platforms, you can obtain the insights required to reward success and retain star performers.

What is a Standard Merit Increase?

While the average merit raise for 2018 is around three percent, organizations may provide more or less based on their financial situation and the other benefits they provide to workers.

For example, a firm may pay below-market wages but provide exceptional benefits, generous vacation time, and other intangibles that make it a top employer. A other one may provide enormous incentives and substantial merit increases, but no additional amenities, like as flexible hours or a free gym membership.

“Giving amounts might be simple or difficult,” adds Kerekes. “Advanced models consider the whole merit budget for the year and which departments are essential for achieving the objectives. These departments may get a few more dollars than less important departments.”

She explains that some approaches examine the compensation of each individual or group and use benchmarking to establish merit raises. If a great performer’s salary is already at its maximum, a bonus might be used to recognize the employee without overpaying.

Merit increase FAQs

The following commonly asked questions provide information concerning merit raises.

What departments are involved in merit increase systems?

Typically, the following team members contribute to the creation and implementation of a merit pay system:

  • Human resources (HR): HR is intimately engaged in the establishment of any merit-based compensation scheme, as well as any subsequent modifications that may be necessary.
  • Management: In addition to managing the execution of the merit pay policy for qualified workers, managers help establish and measure the criteria utilized in a merit pay policy.
  • Employees: In a merit-based pay system, employees concentrate their efforts on attaining the objectives established by management and human resources.
  • Accounting: The accounting department establishes the money allotted for merit-based pay rise initiatives and monitors the corresponding KPIs and disbursements.

Is a merit raise the same for everyone?

Depending on the sort of organization, the policies implemented by management, and each employee’s performance, merit rises might vary significantly. In establishing and executing a merit increase system, therefore, strategic planning is crucial. Creating and executing merit raise programs requires consideration of both the budget and the measures to be used in calculating compensation.

What are other forms of merit pay increases?

Bonuses and/or base-pay increases may be awarded on the basis of merit. Some organizations also employ merit raise systems to decide who receives promotions.

Why do companies use merit based increases?

To motivate the attainment of business objectives, companies may provide performance-based incentives to high-performing staff. Through financial incentives, healthy competition, and better employee retention, these initiatives also contribute to the development of a stronger workforce.

 Conclusion

A merit increase is an annual salary increase for a specific level at your company. The merit increases are based on performance in each job classification and your role within the organization.

A merit increase is an annual raise based on merit, not on seniority. They are granted for performance, and usually are not offered during the first year of employment. If you perform well, your boss will make sure you get a raise.

The first step in getting a merit increase is to keep your manager updated on your progress in each position. Don’t just stop working and hope for a raise. Let him or her know about the great job you’re doing and how well you are performing your responsibilities.

Next, make sure you are working towards goals set by the business. Be open about how you can contribute to the business and be more efficient.

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Pat Moriarty
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