A merit increase is a raise in salary that an employee receives for higher-than-expected performance or notable project completion.
Employers use merit pay increases to incentivize employees to keep up the great work and show appreciation for the employee’s contributions to company goals.
The most common ways to reward employees with a merit increase are:
- Annual raise, based on overall employee performance over the previous 12 months, usually after a performance review
- Pay increase based on achievement, after hitting sales quota, finishing a project, or reaching a milestone
Is the merit increase the same as a pay raise or promotion?
Merit increases are a form of pay raise, but they’re not the same as a promotion. A promotion involves moving the employee to a new, higher position within the company, where they get a higher salary and more responsibilities.
When an employee receives a merit increase, their position (job title) remains the same, but their total compensation grows.
Also, keep in mind that companies often offer a pay raise to their employees each year or every other year (bi-annually). These are given to the entire workforce or department based on tenure rather than individual performance. Pay raises also help companies keep up with salary increases in the industry and are also affected by the cost of living adjustments (COLA).
By contrast, merit increases often focus specifically on work performance and may be awarded to highly valuable professionals in specific positions.
Why do companies give merit increases?
Companies provide merit increases as a way to recognize the top performers in the company and their achievements. Here are some of the reasons why your human resources department might suggest offering a merit increase:
- A merit increase attached to specific company goals helps employees understand which objectives have top priority
- Availability of merit increases can attract top talent and retain high-performing employees
- A merit raise can encourage the entire workforce to be as productive as possible
Who is eligible for a merit raise?
Eligibility for a merit bonus can depend on several factors, like company budget, number of employees, company goals, and more. Employees that contribute to driving business goals or providing outstanding outcomes are typically eligible for this increase.
Here are a few examples of eligibility criteria:
- Exceptional job performance
- Contributions to employee morale
- Notable employee engagement
- Remarkable leadership skills
- Specific achievements within the company
How to implement merit increases
If you want to implement the culture of giving merit bonuses in your company to improve employee retention and thank employees for hard work, make sure the process is transparent. Your employees should be aware of eligibility criteria and all information regarding merit increases should be available for the whole workforce.
Before you award your first merit raise, make sure you establish specific metrics to track performance and clear, objective ways to measure if your employees have reached performance goals. This way, the management won’t get caught in the bias trap when deciding who is going to receive the increase.
What’s the average merit increase?
The standard merit increase is 3 to 5%. This figure can vary based on the employee’s base salary as well as benchmarking within the industry. The amount of merit raise may also relate to what HR leaders feel is competitive and warranted by the work of the employee. The employee’s current salary could also play a role in deciding the amount of the raise, as well as the financial viability of the company during the current fiscal year.
There isn’t a specific formula to calculate a merit increase: companies should take all relevant factors into account when determining how much they can offer their high-performing team members.
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