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What are Merit Pay Increases? A Guide for HR Professionals

Merit increases offer an excellent way to reward outstanding employees; however, they also require strategic planning and implementation for success. To get the results you’re looking for from these incentive programs, your business should review the benefits and drawbacks of merit increases and outline the necessary performance metrics.

Keep reading to learn more about what merit increases really mean and how to create and implement policies that benefit your workers and company.

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What are merit increases?

The definition of merit increase is a financial incentive offered to employees as a reward for reaching certain business goals. A merit raise may also be in order when employees exhibit exemplary performance based on measurable criteria set by employers over a period of time.

Different from employee gifts, these merit based financial incentives are often awarded to high-performing employees. Merit pay increases are commonly observed in performance-based jobs, such as sales and marketing.

Forms of merit pay increases

Merit pay increases typically come in the form of bonuses or base pay increases, but in some instances, they may result in job promotions. These employee incentive programs help companies build a stronger workforce through competition, which leads to innovation and increased productivity. Merit based programs may also increase employee retention by creating a challenging environment that encourages excellence.

Advantages of merit increase programs

Merit pay increase programs convey a multitude of benefits to employers, although the benefits typically depend on their successful implementation and use. Merit increase programs can:

Emphasize business objectives

Merit increases provide an effective way of demonstrating the kind of performance you want to see from your employees. By setting a standard and rewarding employee performance that exceeds the average, businesses can help employees realize how much the company values their contributions.

When workers know what companies want and see the rewards of providing it, merit pay increases for some workers may push others to higher performance levels as a consequence, whether those employees receive merit increases or not.

Identify individual performance

Merit increases help managers identify employee performance individually, rather than as a team. These merit based incentives also point out where each employee has opportunities to improve performance.

Being able to identify low-performing staff gives supervisors and HR professionals a chance to understand weaknesses and address them in a productive fashion that benefits both the worker and the company. Likewise, identifying higher-performing staff highlights people in the organization to keep an eye on for promotions or mentoring other employees.

Improve company standards

Merit pay increases depend on the metrics set by company management. This means businesses and the human resources professionals who monitor merit based programs always have a standard to follow that recognizes good and bad performances.

Since merit raise incentives reward good performance, the possibility of employees following and exceeding basic standards increases. Set standards also ensure there’s no miscommunication with staff and help employees better understand what is a merit raise, so they can strive to get one.

Increase employee retention rates

Using merit increases as a form of reward keeps employee retention rates high. Rewarding good behavior encourages employees to keep working hard and helps them set an example for workers who may be faltering along the way.

These merit raise programs also help managers and supervisors spot employees who are struggling, so they can better coach them to improve performance or find strengths better suited to other areas. This increases employee retention by reducing stress and improving satisfaction.

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Best practices for managers

Merit increase programs are most effective with careful planning and proper execution. Here are a few best practices that managers can utilize when using merit pay increases to boost employee performance:

Develop a clear, consistent and reliable policy

A strong merit pay increase policy must be reliable and consistent since it serves as a guideline for all employees and acts as the basis for management to award merit pay. An unclear policy or one that’s difficult to understand may not serve as a reliable outline of the merit based system.

With that in mind, employees and management should be fully aware of all metrics used in awarding merit based pay to maintain employer-employee trust. At a minimum, HR professionals should complete annual reviews to evaluate or reevaluate an employee’s performance and whether they deserve a subsequent merit based pay increase.

Get advice from the people involved

Obtaining the proper advice from other departments that are involved is very important when structuring better merit pay increase policies. This helps HR professionals develop a systematic and credible method of measuring performance and award the corresponding merits.

To do this, use easily measurable metrics when creating and maintaining a merit pay increase policy to achieve success. Make sure all departments are aware of any changes in the metrics used to determine merit based raises and that they communicate those changes clearly with all employees involved.

Train management and keep them accountable

The effectiveness of the merit increase policy your business implements relies mainly on the ability of management to support the workforce. Every member of management involved with the program needs training to make the policy a success. Holding them accountable for the outcome of the merit increase fosters responsibility for the performance of their employees and also gives them credit for positive results.

To do this, you must outline aspects clearly, typically in writing, and provide opportunities for those involved to address any negative issues that arise as an unintended consequence of the merit increase program.

Listen to your employees’ feedback

Employee feedback on merit based programs is one of the most important tools you can use to encourage professional development. Listening to what employees say helps ensure all aspects of company operations are functioning properly. It enlightens you on which policies work well and what areas need improvement.

An open-door policy and opportunities for anonymous feedback let workers bring ideas or concerns to HR professionals easily. However, there are additional ways to gather valuable employee feedback on your merit pay increase programs. For example, you can conduct exit interviews with employees who leave to better understand what they like and dislike about the current merit based policies. This helpful information may also assist your business in reducing employee turnover based on similar issues.

Keep a consistent evaluation of the merit increase system

Regularly evaluate the merit increase system and change it when necessary. Constant grooming and pruning helps HR professionals streamline processes and add clarity to merit based metrics as they go, ensuring the system keeps up with the varying interests and characteristics of the workforce.

This also helps your company keep track of what works and what doesn’t and the context of successes and failures. Analyzing what worked and what went wrong may help improve already successful merit pay increase policies and prevent repeats of negative outcomes that arise from unsuccessful ones.

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Merit increase FAQs

The answers to the following frequently asked questions can provide you with more information about merit increases.

What departments are involved in merit increase systems?

Typically, the team members involved in creating and implementing a merit pay system include:

  • Human resources (HR): HR is directly involved in the creation of any merit pay system and any changes that may be required along the way.
  • Management: Managers aid in developing and measuring the metrics used in a merit pay policy, including overseeing the implementation of the policy for eligible employees.
  • Employees: Employees are the subjects in a merit pay system and focus their efforts on achieving the goals set by management and HR.
  • Accounting: The accounting department determines the budget allowed for merit pay increase programs and tracks the metrics and payouts.

Is a merit raise the same for everyone?

Merit increases vary greatly, depending on the business type, the policy management implements and the performance of each employee. That’s why strategic planning is very important in developing and implementing a merit increase system. Establishing the budget and deciding which metrics to use in determining pay both go into the consideration of creating and implementing merit increase programs.

What are other forms of merit pay increases?

Merit increases can be in the form of a bonus and/or a base-pay increase. Some companies also use merit increase programs to determine who gets promoted.

Why do companies use merit based increases?

Companies may offer merit bonuses to high-performing employees to encourage the achievement of business goals. These programs also help build a stronger workforce through financial rewards, healthy competition and increased employee retention.

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