How to Run Merit Cycles: A Complete Guide for HR Leaders

At a time when top performers expect real recognition, and the competition for talent is global, companies can’t afford to treat salary increases as a one-size-fits-all event. Across the world, HR and People teams are navigating the complexities of merit cycles: a data-driven approach to linking pay directly to employee impact rather than defaulting to across-the-board raises.

Yet, orchestrating these cycles is no easy feat—missteps in calibration, budgeting, or communication can lead to pay inequities, disengaged talent, or missed business goals. At Deel, we’ve seen firsthand how to use merit-based compensation not just to reward but to retain and inspire growth, making fair, transparent pay a reality at scale.

This comprehensive guide will break down how to design and run an effective merit cycle, from setting budgets using global benchmarks to conducting fair performance evaluations, rolling out seamless payroll adjustments, and measuring results.

1. Planning and budgeting for your merit cycle

When: 3-6 months before merit increases take effect
How much time to allocate: 4-8 weeks

Start your merit cycle by answering one key question: How much can we spend on yearly performance-based salary increases? Your figure sets the stage for every decision that follows, including how you craft merit pay guidelines and how you train your managers to distribute the increases.

Define your merit budget

Work closely with your finance team to set a total merit pool. There’s no universal formula, but most companies consider three core inputs:

• Revenue growth: If the business has grown year-over-year, how much of that growth can support your compensation increases?
• Market benchmarks: Do you pay competitively across key roles, functions, and regions? Where are the biggest gaps?
• Cost-of-living trends: Did inflation or regional cost-of-living adjustment (COLA) factors create pressure points in specific geographies?

A key question to consider is: Who takes ownership of this task? Typically, it’s a joint effort. Finance may propose a total budget as a percentage of total payroll (e.g., 3-5%), while HR shapes how to distribute the pool. For example, they might allocate the pot based on performance, internal equity, and role criticality.

Review market benchmarks

Your talent likely keeps a close eye on what they could get elsewhere. So, benchmark your salary data using reliable, external sources to evaluate where your compensation stands today.

When possible, compare salaries using:

• Job level and function
• Region or location
• Industry peer set

Note: If workers are already at or above the market rate, this typically influences the percentage increase they receive, even with a strong performance rating.

Set merit guidelines based on performance

Once the budget is set, define how you’ll distribute it. That starts with building or refining your merit increase guidelines — a set of recommendations managers use to determine raises based on performance. A structured compensation framework helps here, whether a flexible percentage range or merit matrix by compa-ratio approach. Here’s how each works.

Flexible percentage range

This approach works by assigning percentage increases based on how workers performed over the past cycle. Here are the suggested increases for different performance ratings:

• Exceeds expectations = 4-5%
• Meets expectations = 2-3%
• Needs improvement = 0-1%

Merit matrix based on target compa-ratios

This method considers performance and how a worker’s current salary compares to the market midpoint for their role. The calculation runs as follows:

• Compa-ratio = Worker’s salary divided by the midpoint salary for each role

Workers who perform well and are underpaid relative to the market can receive larger increases, helping move them toward the target range. Workers already near or above market midpoint might receive smaller increases, even with strong performance.

Define eligibility and criteria

You want to avoid a situation where top performers expect a merit increase only to discover they were never in line to receive one. Overcome this challenge by defining who is eligible for a merit increase and how you’ll decide their pay. Common eligibility rules include:

• Minimum tenure (e.g., employed for at least 6 months)
• Hitting a certain performance review score
• No active performance improvement plan

2. Conduct performance reviews to shape merit pay decisions

When: 1-2 months before merit decisions (the data you collect at this step will inform pay decisions)
How much time to allocate: Up to 4 weeks

Performance reviews are central to merit-based compensation cycles. This is where you gather data to guide your raise decisions, whether from formal ratings, manager judgment, peer feedback, or a combination of methods.

Move beyond forced rankings

Not every organization needs a five-point performance rating scale or bell curve to evaluate performance. These rigid systems can create more noise than insight, especially when managers feel pressured to “fit” workers into certain distribution quotas.

Instead, Deloitte dropped traditional ratings in favor of a small set of questions grounded in judgment. One of the most powerful: “If it were your money, would you award this person the highest possible compensation and bonus?”

Deloitte’s strategy cuts right to the heart of merit decisions. It pinpoints the company’s true top performers without overengineering the process.

Define how you’ll evaluate performance

Every organization needs a consistent framework, even if it’s flexible. Decide how managers should evaluate performance and clarify this before the review cycle begins. Common options include:

• Manager-led assessments using behavior- or competency-based criteria
• Peer feedback or 360 reviews
• Self-assessments
• Open-ended feedback combined with a simple rating or recommendation

Encourage self-reflection

Where it makes sense, allow employees to reflect on their performance. Self-assessments add context and give employees a sense of ownership over the process. They also help managers come to conversations better informed about the “hidden wins” their direct reports make for the team.

Keep the process consistent and fair

HR should oversee the review cycle to keep evaluations to a consistent standard. If you use a rating scale, define what each level means and how it connects to the merit increase model. If you rely more on narrative feedback, give managers clear examples of what “above and beyond” looks like.

At this stage, look for potential issues early, like misalignment between performance ratings and compensation expectations.

3. Allocate and calibrate your merit pool to keep pay decisions fair

When: 4-6 weeks before merit increases take effect

How much time to allocate: Up to 2 weeks

Once performance data is in, the focus moves from evaluations to planning your compensation decisions. This is where HR and leadership teams begin translating reviews into numbers. Together, they’ll decide how much each person should receive based on their contributions, current pay level, and available budget.

Hold pay calibration sessions to drive consistency

Calibration meetings are an essential part of keeping merit pay decisions fair. Meeting participants typically include HR business partners, department heads, and senior managers. During these sessions, you’ll compare performance ratings across similar roles or functions and discuss context around high or low performers to avoid bias.

Key areas to watch include:

• High performers who’ve been overlooked for increases
• Teams with inflated or unusually high rating distributions
• Significant differences in recommended increases across similar roles or levels
• Disparities in increased amounts across gender, race, or other demographic groups

If you’re tracking pay equity goals, bring that data into the room during calibration to flag imbalances. When gaps show up, take action, such as:

• Adjusting increase amounts
• Issuing targeted equity boosts
• Holding deeper conversations with managers.

Always document your rationale. Keeping a clear record of equity checks and your actions during the merit cycle maintains compliance and reinforces your commitment to fair pay.

Allocate the budget across teams

Next, apply the merit budget across business units and departments. Most companies allocate funds according to:

• Team size and total payroll
• Distribution of performance ratings
• Role criticality or retention risk
• Market alignment by function or location

In some models, HR provides a fixed merit pool for each team and reviews how managers propose to allocate it. In others, managers make individual recommendations, and HR evaluates the aggregate spending against the available pool. They’ll check for alignment, budget constraints, and equity standards.

Either way, give managers the flexibility to reward top performers while maintaining guardrails to keep decisions consistent, justifiable, and tied to your performance and pay equity goals.

Example: Performance-based calibration at Meta

Meta uses calibration to level performance scores and inform compensation decisions directly. Managers work together to identify standout contributors and ensure the merit budget reflects the most meaningful outcomes rather than scores on a form. The process emphasizes context, manager input, and consistency across a global workforce.

4. Finalize your merit-based compensation decisions

When: 3-4 weeks before merit increases take effect

With the merit pool allocated, each manager formally recommends salary adjustments for their direct reports. The process works as follows:

• Managers recommend salary adjustments based on final ratings
• HR reviews recommendations and ensures merit increases align with company policies and budgets
• Compensation team runs analytics to confirm fairness across gender, tenure, and business units to avoid bias

When something looks off, it’s always worth a follow-up. Once compensation decisions are final, they’re hard to reverse and even harder to explain away if they don’t hold up to scrutiny.

5. Get leadership approval and sign off on your merit increases

When: Up to 1-2 before merit increases take effect

The final merit cycle outcomes should reflect broader business priorities along with team-level performance. At this stage, senior leadership, typically the CEO, CFO, and CHRO, reviews the full picture. Their role is to confirm that the overall spending fits within the approved budget and that compensation decisions support retention, equity, and business continuity.

Lock in salary changes

Once leadership signs off, HR finalizes the updated salaries and preps the data for payroll. Run a final check for accuracy, especially in cases where numbers have changed throughout the review process. Even small mistakes here can erode worker trust fast.

Prepare managers for the conversations ahead

Now, shift gears toward communication. Managers need to understand how to talk about compensation decisions, especially in cases where the raise didn’t meet expectations or where exceptions were made for others on the team.

Workers won’t see calibration sessions or merit matrices. Still, they have conversations with their managers that can either reinforce or erode trust.

Offer short, practical training or one-pagers that walk managers through:

• How to frame increases in the context of performance
• What to say (and what not to say) when workers compare outcomes
• How to answer “Why not more?” with clarity and empathy

Train your managers to lead compensation conversations with confidence.

6. Communicate merit increases to your staff

When: Up to 1-2 before merit increases take effect

Ask managers to meet one-on-one with each team member. These conversations should cover three things:

• The new salary and when it takes effect
• The connection between the raise and the worker’s performance
• Any relevant context around the team, company, or budget

The aim is to be direct and thoughtful. Vague praise or generic messages won’t land well, especially if the raise isn’t what the worker hoped for. Still, you can use specific examples from the performance review to guide the dialog.

Address perceived disparities proactively

Compensation decisions rarely happen in a vacuum, and your workers know that. If two people on the same team receive different raises, questions will arise.

Managers don’t need to justify every number, but they need to explain how the process works and what workers can do to grow. Give managers the tools to respond with clarity:

• Reinforce how compensation ties to performance
• Acknowledge when business decisions or market factors shaped outcomes
• Avoid referencing peers directly, but be prepared to explain reasoning

Follow up with formal documentation

After the conversation, HR should send a written salary increase letter outlining:

• The new base salary
• The effective date
• Any changes to comp bands or bonus eligibility

Keep the language straightforward to create a clear record and eliminate any hint of confusion.

7. Process payroll with new merit adjustments

When: Final week before increases take effect

Merit increases lose impact fast if your employees don’t receive them in full and on time. Treat this as a precision task.

Update compensation in HR and payroll systems

Enter all salary changes into your HRIS and payroll tools, and avoid any manual overrides unless absolutely necessary, as each adds risk. Pay close attention to:

• Effective dates that match payroll cutoffs
• Accurate calculations for percentage-based increases
• Currency consistency for global teams
• Any adjustments tied to bonuses or incentives

Run final checks before submitting

Pull a summary of all compensation updates and compare them against approvals. Review:

• New salaries vs. manager recommendations
• Entry errors or formatting mismatches
• Duplicate or missing changes
• Timelines that could disrupt processing

Confirm changes with workers

Use your standard communication method, such as a payslip or digital dashboard, to show each worker their new compensation. Include:

• Updated base salary
• Effective date
• Any changes to bonus eligibility or pay bands

8. Review and adjust your merit cycle

When: 1-2 months post-cycle completion

The merit cycle doesn’t end when salaries are updated. The final step is about reflection, feedback, and course correction, so your next annual compensation cycle runs even more smoothly while continuing to support your workforce.

Look at what the data is telling you

Start by reviewing the cycle outcomes through a few key lenses:

• Budget alignment: Did total spending stay within the planned merit pool? If not, where did overruns happen and why?
• Pay-for-performance alignment: Did high performers receive the strongest increases? Does the data support that intent?
• Comp band movement: Have you improved market competitiveness for underpaid roles or locations?
• Equity gaps: Are there any unexplained differences in outcomes across gender, race, or other tracked demographics?
• Manager consistency: Did some managers apply guidelines differently than others? Were those deviations justified?

Gather feedback from the people closest to the process

Talk to the people who experienced the cycle from every angle: HR, finance, line managers, and employees. Ask questions that go beyond logistics:

• Did managers feel confident making decisions?
• Were the guidelines clear and useful?
• Did employees understand how decisions were made?
• Did any teams struggle with tough conversations or fairness perceptions?

Collect this feedback and look for recurring pain points that you can solve next time around through better training, tools, or communication.

Document what needs to change

The best merit cycles get better every time. Build a simple action plan and share it across your HR and finance teams. For example:

• If decisions felt rushed, you’ll shift your cycle timelines next year
• If equity issues have emerged, review how you track and uncover that data during calibration.
• If performance ratings didn’t drive outcomes, rethink how those inputs feed into compensation.

Proposed merit cycle timeline

Merit-based compensation management for global teams with Deel

There are plenty of moving parts involved in the average merit cycle. But they become even more complex in global cycles when different currencies, job markets, and compliance requirements can slow things down or introduce bias.

Deel cuts right through that complexity and gives you the tools to make smart, data-backed decisions without jumping between systems or spreadsheets. Here’s what you can expect:

• Automated compensation planning: Build and adjust compensation bands with real-time data, run salary reviews without manual overhead, and give managers the tools to make decisions faster, with just the right level of control
• Performance management integration: Use Deel Engage to collect actionable feedback, align performance inputs with pay decisions, and simplify performance management cycles across teams and time zones
• Global salary insights: Tap into salary benchmarks from over 150 countries. Compare roles, regions, and market trends to stay competitive no matter where you’re hiring
• Seamless payroll execution: Push approved raises straight into global payroll with zero duplication. Deel handles currencies, local compliance, and delivery, so your teams get paid the right amount on time, regardless of their work location
• A unified process and platform for all worker types: Whether you employ direct employees, contractors, or EOR, Deel’s built-in Global HRIS sets the foundation for a unified compensation and performance management process

By consolidating these features into a single platform, Deel empowers organizations to implement merit-based compensation strategies effectively on a global scale.

Ready to enhance your global compensation strategy? Book a demo with Deel to discover how our solutions can support your organization’s needs.