What Is a Merit Increase? | Definition And Why It Matters

There is no better feeling for many employees than being recognized. In the past, high-performing employees are rewarded with words of praise or recognition.

However, in recent years, the hard work of top performers has earned them a raise in pay through a merit increase. Merit raises are common practice in the United States.

Merit raises received an average budget of three percent of base salary in 2020. Depending on the organization, this figure could be as high as 5% or even 10%.

This guide will look at the concept of merit increase, and why it is important. Since merit raises differ from other types of pay or pay increases, it’s critical to understand the distinctions. We’ll look at eligibility and which employees are most likely to be eligible for merit raises.

What is a Merit Increase?

A merit increase is a pay raise given to employees in order to reward their work performance. With this system in place, you can draw a link between an employee’s performance in relation to company goals and their pay.

Assume your employee has outperformed your expectations. Their contributions were directly related to company goals, according to the annual performance review. This could be rewarded with a percentage increase in base pay.

The amount of a merit increase will be determined by the percentage of the total salary that is being considered. This amount is typically around 3% on average.

Employees may, however, receive varying percentage increases. This entirely depends on their contributions to the company’s success.

Through rewards and recognition, a merit increase encourages hard work. It also boosts employee morale and encourages superior job performance.

Why are Merit Raises Important?

It is helpful for businesses to implement a system that links hard work with financial rewards. It will benefit not only the employee but also the organization. The following are some benefits of merit increases:

Monitor your progress

When monetary incentives other than salary are attached to a worker’s effort, the company pays close attention to individual performance. This can be seen when an organization establishes specific goals for the month, quarter, or year. Employers reward employees who achieve these objectives.

Clarify the company’s goals

By tying incentives to specific goals, the company communicates its top priorities. There is no doubt about what employees should focus on and how their contributions will affect the company and their personal earnings.

Achieving your own goals in the company you work at will help you greatly. Consider: How To Set Career Goals And Achieve Them

Encourage workplace productivity

When employees know that their direct efforts may cause a pay raise, they are more likely to align their efforts with company objectives.

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Employees used to put in an average performance throughout the month if there was no incentive. However, the possibility of a merit increase can motivate additional effort toward company goals.

Increase retention

Employee turnover is likely to be lower in an environment where employees are rewarded for their efforts beyond a salary.

Employees will stay in a workplace where they believe they are valued. The knowledge that direct effort will cause additional benefits will undoubtedly encourage employee retention. Aside from that, businesses improve their access to top talent.

Is A Merit Increase The Same As A Promotion? 

In a nutshell, no. A merit increase is a reward for excellent performance, but it does not imply that the employee will be promoted. A merit increase raises an employee’s salary while keeping them in the same position.

Think of a merit increase as recognition and appreciation. A promotion entails advancement in one’s career. This frequently entails increased job responsibilities, greater contributions, and a new title.

Merit Increase Vs. Pay Raise

A merit increase is, at its most basic, a raise in a worker’s pay. However, while this description is correct, it cannot consider the true characteristics of the increase.

Merit pay is directly related to a worker’s performance in relation to the company’s goals and objectives. It is a bonus for putting in extra effort by the employee.

A pay raise is an increase in base salary. This raise is typically given in recognition of the time spent working for the organization, as well as other factors, such as cost-of-living adjustments. In merit raises, top performers are the usual suspects. A pay increase may not be contingent on performance.

Who Should Get a Merit Increase?

Merit raises, which are distinct from promotions, are used to reward successful performance. Many organizations and human resources (HR) professionals look for employees who excel in their positions.

Employees who receive merit raises do not receive an increase in responsibilities, as previously stated. Therefore, besides recognition and appreciation, it is critical to use merit increases as a reward for your employees.

Here are some things to consider when deciding who should get a merit raise:

  • The employee is in good standing and is doing a good job (as noted in the performance review)
  • There are funds available for a pay raise.
  • Merit raises have been recommended by leadership for employees under consideration.
  • The employee being considered for a merit increase is paid within the range for their position.

What Is The Average Merit Increase?

The average merit increase is about 3%. However, that figure is likely to change in 2022. The Great Resignation (or Great Reshuffle) has triggered a talent war.

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With a record number of employees leaving their jobs, businesses are doing everything they can to keep their best employees.

According to experts, merit increases can reach up to 5%. Indeed, Grant Thornton discovered that more than half of HR leaders in the United States expect their organizations to increase the average merit increase to more than 5%. More companies are also expanding things like employee eligibility for a cash bonus.

Merit raises differ according to job function and department. Some businesses examine how specific departments contribute to the company’s goals. Current salary (particularly in relation to the salary range) is another factor to consider.

How To Calculate Merit Increase

Merit raises are a sure way to keep employees and reward performance in an organization. The following steps should be followed to properly model this system of merit increase for a company:

Figure out how the role affects the business

While various components contribute to a company’s success, a company should consider the impact of merit increases.

Organizations that implement merit increases must ensure that the merit increases impact the company’s objectives.

This may include roles that are difficult to replace within the organization. Similarly, positions whose setbacks can have a significant impact on company performance should be carefully compensated.

Rewarding excellence in these roles with merit bonuses may help to lower the risk of turnover and errors in the business. In the end, this can boost company efficiency and earnings.

Performance should be graded objectively

Examine an employee’s efforts in the workplace holistically, besides performance reviews. When determining merit increases, organizations should consider some of the following key factors:

  • Superiors’ observations
  • Standing alongside coworkers
  • Paying close attention to detail

Examine whether merit increases with increased effort

Merit raises can help high-performing employees keep their jobs and boost their morale. However, if other factors are lacking, this system may not be enough to keep employees satisfied at work.

Before implementing additional compensation, the company should assess how the employee experience has been. Some enhancements include more paid time off, expanded benefit offerings, and greater flexibility.

If it is determined that a merit increase will improve operations, the company may choose to pay the same merit bonus of, say, 3% to all employees.

Alternatively, higher-performing employees may be rewarded with a 5% bonus, while others receive a 2% bonus. In other scenarios, only the highest-performing roles that are critical to the company’s operations will receive a 5% raise.

Everyone else will be entitled to a 2% salary increase. Every employee in a critical role in the company will receive a 5% raise, regardless of contribution to company goals, where possible.

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Frequently Asked Questions

What is a possible problem with using merit raises?

Merit pay plans may create problems in employee relationships, problems in morale related to jealousy, fear, favoritism, undesirable competition, and job insecurity. Employees who participate in meritocracies are more likely to develop divisive and competitive attitudes than those who participate in meritocracies.

How is the merit increase determined?

Merit raises are typically a small percentage of your overall salary, with an average of about 3%. The same company may offer a one-percentage-point merit increase to one employee and a ten-percentage-point merit increase to another, based on how their performance ranks within the company.

How do you react to a pay raise?

You could say- “I am delighted to be a member of your team. Thank you for the yearly merit raise”

Is a merit raise the same as a salary raise?

No. A merit increase is a reward for good performance, but it does not imply that the employee will be promoted. A merit increase raises an employee’s salary while keeping them in the same position.

What is the difference between a merit raise and a merit bonus?

The distinction between merit pay and a bonus is that merit pay is typically added to or incorporated into an employee’s base salary, whereas a bonus is a one-time payment.

What effect does merit pay have on salary?

Merit pay, also known as incentive pay or pay-for-performance, entails increasing employees’ base pay or awarding bonuses based on their performance. Merit pay may be used in place of simple pay raises, seniority-based compensation increases, or general cost-of-living adjustments.

Conclusion

Unscheduled pay raises or bonuses for deserving employees can build loyalty, keep top talent, and boost morale. However, doing so without a plan can have the exact opposite effect.

The whole point of merit raises is to reward the most productive and high-performing employees, which motivates others to do better. Employees will be confused, angry, and ultimately less productive if merit raises are given out on a whim or there isn’t a clear idea of how to outperform and get the raise.

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