Merit increases are pay raises given to employees based on performance and merit. They reward employees for their hard work and contributions to the company.
This guide will provide an overview of merit increases, how they work, and tips for negotiating them.
Background on Merit Increases
Merit increases have been a common practice for decades. Companies use them as an incentive to boost employee motivation and retention.
Employees see merit increases as a validation of their efforts.
Merit increases are calculated as a percentage of an employee’s base pay. For example, a 5% merit increase would bump someone from a $50,000 salary to $52,500. Companies determine merit increase percentages based on individual performance reviews and budgets.
8 Characteristics of Merit Increases
- Performance-based: Merit increases reward high performers. Employees must earn them through strong contributions.
- Pre-planned: Companies decide merit increase budgets ahead of time during financial planning.
- Percentage of pay: Merit increases are calculated as a percentage bump to base pay. A 5% merit increase on $50,000 salary is $2,500.
- Annual cadence: Most companies give merit increases once a year during review cycles.
- Not guaranteed: No employee is entitled to or guaranteed a merit increase. They are based on performance.
- Discretionary: Managers have discretion in allocating merit increases based on reviews and budgets.
- Variable: Merit increase percentages vary across employees based on performance differentiation.
- Motivational: Merit increases incentivize employees to perform at high levels.
How to Calculate a Merit Increase
Here is the formula to calculate a merit increase:
Current base pay x increase percentage = Increase amount
For example:
$50,000 base pay x 5% increase = $2,500
So a 5% merit increase on a $50,000 base salary would equal a $2,500 bump.
5 Steps to Negotiate a Merit Increase
- Research industry standards: Understand typical increase percentages.
- Review your achievements: Quantify your contributions and impact.
- Rehearse your pitch: Practice presenting your case confidently.
- Ask at the right time: Schedule a meeting at the end of a review cycle.
- Follow up: Send a thank you note and reiterate your value.
Features, Benefits and Challenges of Merit Increases
Features:
- Performance-based
- Percentage of pay
- Annual cycles
- Manager discretion
Benefits:
- Motivate employees
- Reward top talent
- Drive higher performance
- Promote loyalty and retention
Challenges:
- Budget constraints
- Perception of unfairness
- Complex performance linkage
- Requires robust review process
Examples of Merit Increases
- A sales rep receives a 7% merit increase for exceeding her sales quota by 15%.
- An engineer gets a 3% merit increase for completing a major project on time.
- A manager is awarded a 10% increase for reducing costs by 20% in her department.
Conclusion
Merit increases are an important compensation tool for motivating and retaining top talent.
Employees should understand how merit increases work and negotiate them based on performance and impact. We hear this from customers that regularly use our leadership courses.
When used effectively, merit increases promote a high-achieving culture.
