What is a Merit Increase? definition, example, calculation

A merit increase is a way for employers to express appreciation for employees' hard work, dedication, and exceptional performance within the organization. This acknowledges contributions and motivates employees to excel even more.

When planning to grant merit increases, it is essential for employers to establish clear and transparent criteria for determining who qualifies for an increase and to understand how to calculate the merit increase.

What is merit increase

A merit increase is a salary adjustment given to deserving employees for performing exceptionally well and exceeding expectations. It's a tangible acknowledgment of valuable contributions and outstanding achievements in the organization.

Unlike some forms of merit pay, which may be variable and tied to short-term goals, a merit raise provides a permanent boost to base salary, which ensures consistent growth in overall compensation and contributes to long-term financial stability.

Merit increases are often given in formal performance reviews, where managers evaluate employee performance based on established goals and objectives. Factors considered may include:

• Exceeding goals. Outperforming targets in sales, productivity, and project milestones.

• High-quality performance. Consistently delivering top-notch work, exceeding client expectations, and showcasing strong problem-solving skills.

• Going above and beyond. Taking initiative, contributing to team success, and showing creativity to improve processes or results.

Merit raises are usually decided based on preset criteria or salary ranges tied to performance. Companies can choose to give raises in percentages, fixed bonuses, or a mix of both, depending on their policies and budget.

Merit increases have important roles, such as:

• Motivation and engagement. Acknowledging outstanding performance boosts employee motivation and engagement, which drives dedication and success.

• Retention and talent management. Providing competitive merit raises attracts and retains top talent, contributing to a strong and stable workforce.

• Performance alignment. Linking compensation to performance reinforces desired behaviors and encourages employees to align their efforts with organizational goals.

That being said, it's essential to do merit planning thoughtfully and strategically. An effective merit planning process involves careful consideration of fairness, equity, market benchmarks, and employee development.

Does everyone get a merit increase?

No, not everyone gets a merit increase. Merit raises are often awarded based on individual performance and contribution to the organization, so only employees who consistently exceed expectations or demonstrate exceptional value are likely to receive one.

Here are key factors that usually determine who receives an increase:

• Performance. Companies evaluate employee performance through reviews, achieved goals, and metrics.

• Contribution. Going beyond expectations, including taking on extra responsibilities, surpassing goals, and generating new ideas.

• Budget. Limited resources mean not everyone deserving may get a merit increase.

• Company culture. Some prioritize performance, while others may consider factors like seniority or cost of living.

Difference between a promotion and a merit increase

The main difference between a promotion and a merit increase is that promotions offer career advancement with more responsibility and a possible raise, while merit increases recognize good performance with a guaranteed boost to your paycheck.

To fully understand the distinctions between a promotion and a merit raise, consider the following table below:

Feature	Promotion	Merit Increase
Change in position	Yes, moves employees to a new, higher position.	No, employees remain in the same position.
Job title	Usually changes to reflect the new role and responsibilities.	Stays the same.
Responsibilities	Increases or changes significantly compared to the previous role.	Remains similar or may see minor adjustments.
Decision basis	Primarily based on experience, qualifications, and skills suitable for the new position.	Primarily based on individual performance, exceeding expectations, and contributing to company goals.
Salary increase	Likely, but not guaranteed. Depending on the company structure, it may not be significant compared to the higher responsibilities.	Possible. Generally smaller and tied to performance evaluation outcomes.
Career advancement	Significant step forward in career path.	Shows positive recognition and can pave the way for future promotions.
Frequency	Less frequent, usually when open positions become available.	More frequent, often annually or based on performance review cycles.
Motivation	Drive to take on new challenges and gain broader experience.	Recognition for hard work and contribution, boosting morale and productivity.

Note: The table comparing promotions and merit raises provides a general overview and may not capture every company's policy. Each organization has its unique structure and approach to career advancement and compensation.

How much is average merit increase

The average merit raise falls around 3%, but in some cases, it can reach 5% of an employee's current salary. Some companies offer as low as 1%, as increases depend heavily on individual performance. Please note that these figures are averages, and actual increases can vary based on factors such as individual performance, company policy, and economic conditions.

Average merit increase 2023

The average increase for 2023 was 3.8%, according to a 2023 survey. This is a significant uptick from pre-pandemic averages and reflects challenges from a tight labor market and inflation. The survey also shows that organizations plan a 3.5% budget for merit raises, which is a decrease from the 3.8% reported.

Average merit increase 2022

In a 2022 survey, the average merit raise for that year was 3.4%. This figure represented a slight increase from the previous year, which had been 2.8%, reflecting the economic recovery following the global pandemic. As businesses regained stability, they were able to allocate more resources toward rewarding employee performance.

Example: what is a good merit increase

There is no universally defined "good" merit increase, but the standard merit raise is 3%. Therefore, considering this range for employees should be regarded as a starting point for acknowledging their contributions.

But also keep in mind that while a 3% standard merit raise is a common benchmark, what's considered a "good" increase varies among employees. It often acknowledges satisfactory performance and living cost adjustments. Those consistently exceeding expectations should have extra recognition opportunities.

For example, Alex has consistently met and exceeded performance expectations in their role as a Sales Associate. The standard merit raise in his company is typically around 3%. However, due to Alex's exceptional performance and significant contributions to achieving sales targets, a "good" merit increase for him might be considered at 5%.

Employee: Alex

Current position: Sales associate

Current salary: $50,000 per year

Performance highlights:

• Exceeded sales targets. Consistently met and exceeded sales targets, which contributed to a 15% increase in revenue.

• Client satisfaction. Received positive feedback from clients, which indicates high satisfaction with Alex's service.

• Team collaboration. Actively collaborated with the team, which leads to a more cohesive and productive work environment.

Here, due to Alex's excellent work, a 5% merit raise of $2,500 (5% of $50,000) would raise their annual salary to $52,500. This increase acknowledges Alex's contributions and motivates them to maintain high-level performance and commitment.

How to calculate merit increase

Calculating a merit raise typically involves determining a percentage of the employee's current salary based on their performance and other relevant factors. Here's the formula:

Merit increase = Current salary x (Merit percentage/100)

1. Step 1. Define Merit Percentage

   The first step to calculating merit raises is to get the merit percentage. It's usually determined by company policies, performance reviews, or other factors. It represents the percentage increase in the employee's current salary.

2. Step 2. Calculation

   Multiply the current salary by the merit percentage expressed as a decimal. For example, if the merit percentage is 5% and the current salary is $50,000, you want to multiply the current salary by 0.05.

   Merit increase = $50,000 x 0.05
   = $2,500

3. Step 3. Calculate the New Salary

   Then add the given increase to the current salary to find the new salary.

   New salary = Current salary + Merit increase
   = $50,000 + $2,500
   = $52,500

FAQs

Below are some frequently asked questions (FAQs) to provide clarity on common queries about merit raises:

What is a merit increase of 5%?

A 5% merit increase means that an employee’s salary is increased by 5% as a reward for their hard work and contributions to the company. For example, if employee A earns an annual salary of $60,000, the increase would amount to $3,000 (5% of $60,000). Consequently, the new annual salary for employee A after the merit raise would be $63,000.

Is a 3% merit increase good?

It depends. A 3% merit increase is often considered a benchmark for recognizing and rewarding employees for their contributions. However, whether it's considered good can depend on individual expectations, industry norms, and economic conditions.

What is a good merit percentage?

As mentioned, a 3% merit raise is often considered a starting point; therefore, a percentage range of 3% to 5% may be considered good.

How do you discuss merit increase with an employee?

When talking about an increase with an employee, start by recognizing their achievements. Clearly explain why they deserve the increase, whether it's due to excellent performance or taking on more responsibilities. Share the details of the raise, answer any questions they may have, and encourage open communication. Express gratitude for their hard work, emphasizing how it contributes to the company's success.