Merit Increases: What Every Employer and Employee Should Know

Organizations are beginning to face the reality of the great resignation, and it’s important to start seeking effective strategies to retain the best talents. A recent study reveals that about 4.3 million workers in the US, resigned from their jobs in a particular month. While the reasons for resignations are difficult to quantify, employers need not wait till this happens before seeking ways to incentivize talents from leaving their jobs.

When employees feel appreciated for what they do, they’re less likely to look for new jobs or resign from their roles. A major way to prove this to employees is to introduce merit increases into their pay. In this guide, we explore—what is a merit pay increase, why it’s important, and how to determine when an employee deserves it.

What is a merit increase?

A merit raise or increase is the organization’s compensative effort to reward an employee’s performance on the job apart from their salary. It’s given as a recognition of an employee’s outstanding performance and as an incentive for other employees to work hard.

Merit increases must be carefully planned out, with clear metrics to measure when an employee is deserving of it. Essentially, it is different from a pay raise, which is an increase in an employee’s base salary.

Why are merit increases important?

Using merit increases to prove to employees that the organization is aware of their efforts and contributions goes a long way. The fact is, it positively impacts both employers and employees. Some benefits include:

Laser focus effort on attaining set objectives:

Once employees are aware of the extra pay they could get for meeting a set objective, they set their minds to getting it done with laser focus. This way, employers can rest assured that energy is being put in the right direction and expect positive outcomes.

Like-mindedness in achieving results on set tasks:

A common awareness of the results to be achieved and the benefits attached makes it easy for employees to work together seamlessly. It’s even more effective when everyone on a team is eligible for a merit raise—they work in sync to ensure maximum delivery on the assigned task.

Reduces the need for monitoring and micromanaging:

Since the objectives and results are common knowledge within the organization, the employees put all effort into the job at hand. This reduces the need for monitoring workflow to every detail. Also, managers can focus on executing more important aspects of the project instead of micromanaging their employees.

Allows for the multiplicity of ideas and innovative approaches:

With the incentives attached, employees can come up with a plethora of ideas and innovative approaches to deal with the challenge at hand. Without the incentives, they may not consciously put effort into going the extra mile.

Quality talent retention:

Once employees know that they’re paid commensurate to their efforts—and more—they’re looking to stay longer on the job. Incentives can help to give a sense of security and make them choose to remain on the job despite other attractive openings.

How do you determine if an employee is deserving of a merit increase?

As a manager, you need to pay close attention to employees who deserve merit increases as they go about their job roles. Since such employees are often easy to identify, recognizing their efforts can go a long way for both the employers and the employees. Here’s how to know employees that deserve it.

Have your goals outlined:

The first step is for the organization to look into its strategic plan to observe what’s important to them. They can then draw objectives from it, and clearly state what expectations they have of their employees and metrics that could get them a merit increase. With this, the terms are clear to all employees, and they can work hard at attaining them.

Great performance:

An employee who is a high performer will do more with or without a merit increase. When someone goes all out on their jobs, it’s best to recognize their efforts so they can feel valued.

Available budget and talent retention:

The merit increase is subject to the budget earmarked for it, in the business year. For top talents that recruiters are constantly hunting for with exciting offers, you need a strategy to retain them. You might consider reviewing your budget for merit increases so the job stays competitive to them. It’s best to see such increases as an investment to keep the best talent with your organization, rather than losing them to other employers.

Employee’s level on the pay band:

All employees have their levels on the market pay band for their roles—minimum, midlevel, or maximum. High-performing employees who are still within the range can be given a merit increase, as a recognition of the employee’s expertise and skills.

How much should you give for a merit increase?

It’s important to determine what each employee deserves when it comes to merit increases. Like any other thing, it should be well planned for. Otherwise, the organization might end up going beyond its capacity in a bid to maintain the standard or satisfy all employees.

So how much should you give?

Ideally, a merit increase is budgeted around 3%, but more recently there are projections of up to a 5% increase. This is to accommodate the recent volatile economy and increasing inflation rates amongst other things.

In the face of looming labor shortages, organizations are employing more proactive approaches—such as increasing employee benefits to keep them on the job. According to a recent Grant Thorton survey, over 50% of HR leaders indicated that their organizations are looking at up to a 5% budget. This is a wider range from the average 3% and another survey reported a likelihood of a 3.9% increase for most organizations.

As an organization, you have to determine your priorities in reviewing your budget for merit increases. Most employees are seeking new job roles with the hope of better pay. If retaining top talent is a priority, then it’s best to ensure that the incentives all add up as close to the maximum pay band as possible.

Importance of giving merit increases at the right time

Merit increases are pivotal to your overall work culture, and it’s even more effective when done at the right time. Here’s why you should consider them early enough:

Helps employees feel valued:

Employees who give their best on the job feel valued when the merit increases come at the right time. If it comes much longer than anticipated they’re not likely to appreciate the effort. It could even make them feel undervalued, leading to reduced performance on the job. Rewarding them early helps them to put more effort into their performance and output on the job.

Prevents unnecessary remedy:

There would not be a need for remedial actions if merit increases are paid at the right time. For instance, late payment of merit increases could lead to less job productivity which may affect the overall organizational performance. Also, top talents may be forced to take on more rewarding job opportunities. In either case, the management will need to seek remedial strategies to improve organizational performance or attract new talents.

Increased job satisfaction:

When workers know that they are getting increases commensurate with their effort on the job, there’s a natural feeling of satisfaction. This reduces the tension on the job, and cooperation among employees. Overall, they will feel satisfied and seek new ways to contribute their skills to achieve organizational objectives.

How often to give merit increases?

Various metrics are used to determine employee performance depending on the nature of the organization. Some organizations have a standard of annual merit payment, however, various dynamics are setting in. With the current talent retention challenge, there may be a need for merit increases to be more frequent.

The annual merit pay cycle may work where everyone is aware that a performance review is done annually. However, this may not be favorable for an organization that’s in a talent competitive market. The management may seek to settle with something more strategic, that consistently rewards talents for their efforts within the business year. This helps them to choose the organization that they currently work with over a new one with equally exciting offers.

Organizations can work at defining policies that guide merit pay increases as it’s specific to their budget and prevailing industry practices. It helps employees to know what to expect since they’re familiar with the overall industry best practices.

What do you tell employees who don’t get one?

Merit increases are not handouts to all employees for doing their jobs. They’re given to employees who are deserving of it—hence some employees are not likely to receive them. Here’s how to communicate the situation to such employees.

Clearly state the terms underlying the increase:

Once there are clear metrics on performance, everyone is clear on what to expect. Managers can then refer those who don’t qualify for a merit increase back to the terms if they request to know why. They can now critically analyze their shortcomings and identify areas to improve, to qualify for the next one.

Clearly state the benefits they’re entitled to:

Some employees are due for a pay raise or might have recently gotten a pay raise. In such instances, they are not likely to receive a merit increase even if they’re high-performing. An employee who is getting a pay raise should be informed on what to expect instead of a merit increase. Likewise, the employee who has just gotten a raise within the period should be clear on the fact that the increase already reflects in their base pay. In general, aside from merit increases, various benefits could be attached to the job. Employees entitled to these benefits should be aware of what they’re getting in place of the merit increase.

Recommend coaching for underperforming employees:

It’s not unusual to find employees who are not giving the best expertise on the job, for the pay they receive. In such cases, they cannot be entitled to a pay raise. It’s best to recommend such employees for professional coaching to help them harness their strengths and give the best to their jobs. This can be considered an alternative investment to boost their productivity in place of a merit increase.

Takeaway…

Providing merit increases to employees is important for any organization. It’s not just enough to give an increase, it must be given at the right time and to deserving employees. No one wants to work in a job where they don’t feel valued. Hence, employers must consider merit increases as an important compensation to foster employee retention.