In the pursuit of building thriving organizations, unlocking the full potential of employees becomes a paramount objective.
Organizations understand that recognizing and rewarding exceptional performance is crucial for individual motivation and fostering a culture of excellence that permeates every aspect of the workplace. That’s where the concept of merit pay increases emerges as a catalyst for unlocking extraordinary achievements.
Monetary compensation is among the most common and practical tools to incentivize and retain employees. A company can offer its employees different types of salary increases, including pay raises, performance bonuses, cost-of-living adjustments, and merit pay.
Join us as we examine the symbiotic relationship between performance and recognition and how merit pay increases can fuel your organization toward unparalleled success. From attracting and retaining top talent to boosting employee engagement and driving continuous improvement, we uncover the remarkable possibilities that arise when organizations prioritize rewarding excellence.
What is a Merit Increase?
A merit increase, also known as a merit pay increase, is a salary increase given to employees based on their performance, contributions, and achievements within an organization.
It is typically awarded as recognition for exceptional job performance, meeting or exceeding performance goals, demonstrating valuable skills, or making significant contributions to the company’s success.
Merit increases are often determined through performance evaluations and are intended to reward and motivate employees to continue delivering high-quality work. The merit increase can vary based on factors such as the employee’s performance rating, budget constraints, and company policies.
Merit Increase Vs. Pay Raise
While both merit increases and pay raises involve salary increases, a mere categorization of them as such overlooks their distinct characteristics, underlying motivators, and determining factors.
A merit increase directly correlates with an employee’s performance, rewarding their exceptional contributions to achieving or surpassing company goals and performance targets. It acknowledges top performers within the organization who have demonstrated hard work and dedication.
On the other hand, a pay raise is not tied to individual performance and may be based on factors such as employee tenure or cost-of-living adjustments. Unlike a merit increase, pay raises are typically distributed evenly across employees without considering individual accomplishments.
It is important to distinguish that a merit raise does not equate to a promotion; rather, it recognizes an employee’s outstanding efforts and performance while they remain in their current role. However, a merit pay increase can serve as a stepping stone for career advancement, as employees can leverage their exceptional performance to support their case for a promotion.
How Much Is a Standard Merit Increase?
A merit increase varies depending on the organization, department, and job function. For a company that prioritizes its employees and focuses on awarding its top performers, a standard merit increase can be between 3% and 5% per annum.
However, to appropriately incentivize your employees, you must keep the merit pay increase independent of the pay raise. This is necessary to account for inflation and changing market conditions (change in job expectations or demand for a particular skill set).
Why do Merit Increases Matter?
One of the biggest reasons merit increases matter is that they appreciate high-performing employees and recognize their hard work. And when employees feel seen and appreciated, their morale improves, they perform better, and they are less likely to quit. Additionally, merit raises can help you attract the right talent while retaining your star performers, which is crucial for your business.
A few additional benefits of merit increase are:
1. Facilitate Progress Tracking
Companies have to keep a close eye on individual employee performance to implement successful merit pay increase strategies. This allows companies to track their employees’ progress effectively, set realistic goals, and implement training interventions wherever necessary.
2. Offer Clarity on Company Objectives
Attaching monetary incentives to performance goals forces employers to communicate well-articulated and clear performance objectives. This eliminates any ambiguity regarding the company’s goals and allows the employees to see how their contributions can help the company and boost their earnings.
3. Encourage Productivity
Merit increases allow employees to see what KPIs to focus on and how their efforts directly contribute to their salary adjustments. This incentivizes them to put in more focused efforts to help the company reach its goals.
4. Improve Employee Retention Rates
Employee turnover and retention are two of employers’ most significant indicators, especially in the current labor market conditions. If an employer appropriately recognizes and rewards an employee’s efforts, it will likely reduce employee turnover rates. Employees who feel valued will want to stay with the company, allowing the employers to retain and leverage their top talent for a competitive edge.
What is the Average Merit Pay Increase?
The average merit increase refers to the typical percentage or amount by which an employee’s salary or compensation is raised. This increase is based on their performance, contributions, and overall merit. It is an annual adjustment that organizations provide to reward and recognize employees’ efforts and achievements. The actual average merit increase can vary across industries, companies, and regions, influenced by factors such as economic conditions, market trends, and company performance.
While there is no universal standard for the average merit increase, it is generally intended to reflect an employee’s value. Additionally, it serves as a motivation for continued excellence and performance. Employers often conduct performance evaluations to assess their employees’ performance. They also consider various factors such as individual performance, market benchmarks, and budgetary constraints. These factors help determine the appropriate merit increase for their employees.
Some of the most common reasons for this increase in the average merit increase are:
1. Tight Labor Market Conditions
The international labor market expected “The Great Resignation” or “The Turnover Tsunami” following the pandemic. The experts were anticipating employees would leave toxic and unsupportive workplaces to find more suitable employers. This caused concerns surrounding tight labor market conditions and an inevitable talent war. It also prompts a more focused strategic approach to employee retention.
2. Employee Expectations
An extension of the earlier point, the balance of power is now back in the hands of employees. Employees now have the option to seek alternative employment opportunities if compensation and working conditions do not match their expectations. This forced employers to rethink their retention policies and focus on recognizing high-performing employees to retain their productivity.
3. Cost Management
As global inflation rates continue increasing, employers must adjust their salary offers to match the inflation. And although this does not directly factor into merit pay increases, cost management concerns significantly contribute to salary adjustments.
How to Calculate Merit Pay Increases?
Studies have shown that losing a high-performing employee costs a company much higher. It results in lost clients and revenue, as well as recruitment and training costs. Focusing on retention proves to be more beneficial in the long run. Therefore, it is crucial to reasonably determine merit increases to ensure your top performers stay with you.
The steps to calculate merit increase include:
1. Examine How an Employee Impacts the Business
The first step is understanding how the employee (or their role) impacts the business financially and how significant that impact is. Understanding this is crucial to determining whether a merit increase is sustainable and can improve business outcomes.
2. Objectively Assess their Performance
Once you have identified business-critical roles, the next step is objectively assessing their performance. This goes beyond simple performance reviews and should include factors like attention to detail, standing with their team, and observations by reporting managers.
3. Critically Observe Whether a Merit Raise Will Work
Although merit raises can boost retention, they are not the only factors contributing to an employee’s decision to stay or leave. So before implementing a merit raise, examine other factors like employee experience, satisfaction, or work-life balance. If these factors contribute to an environment that promotes retention, then, and only then, will a merit raise work.
4. Model the Merit Increase
Once you are sure a merit increase will help you retain your top performers, the next step is modeling how different pay merit pay increase scenarios will impact your business. The goal is to find the strategy to retain the most people at the lowest cost before implementing the best increase plan.
Implementing merit increases is a great move to recognize, reward, and motivate your employees. It encourages them to stay with you and contribute more effectively towards organizational goals. It can help boost employee morale and productivity while retaining top performers in today’s tight labor market.
Frequently Asked Questions
What is a merit increase?
A merit increase is a performance-based salary adjustment companies offer their high-performing employees. Proper strategic implementation can facilitate employee retention, performance, and productivity management.
