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Rewarding employees for exceptional performance remains a highly effective strategy for retaining top talent and motivating others in 2026. One of the primary methods companies use to incentivize quality performance is through merit increases.
However, organizations must implement merit increases thoughtfully. Without a clear framework, employees may become frustrated with a system that lacks transparency regarding how to achieve a pay raise.
In this article, we’ll define what a merit increase is and how you can position yourself to earn a significant pay bump.
Key Takeaways:
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A merit increase is a pay raise awarded based on objective performance metrics.
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The average merit increase is approximately 3%.
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Merit increases can be given as an annual raise or in recognition of exceptional contributions.
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Typically, merit raises are distributed proportionally, depending on the company’s budget for raises.
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Effective merit increases should be transparent, standardized, and ongoing.
What Is a Merit Increase?
A merit increase is a pay raise awarded to employees based on objective performance metrics evaluated over a specific period. Companies may offer merit increases annually or in direct response to outstanding work.
A common method for distributing merit increases is to provide all employees with a percentage raise based on their performance, with top performers receiving the highest percentage increases. This approach serves to reward the most productive employees and encourage others to improve their performance.
How Does Merit Pay Work?
Merit pay typically forms part of a broader budgeting process. Organizations allocate a merit pool for the fiscal year to fund pay raises. In a typical scenario, a company may designate enough to provide an average merit increase of 3% for all employees.
Managers then distribute funds from this pool based on employee performance, with top performers receiving raises exceeding 3%, while those who underperform may receive less than 3% or no raise at all.
It’s important to note that the percentage increase an employee receives is not based solely on performance. An employee’s current salary relative to the salary range for their position also influences merit increases.
For instance, an employee earning at the lower end of the scale who exceeds performance expectations may receive a larger merit increase compared to an equally exceptional employee whose salary is already at the higher end of the range.
If a company wishes to reward an exceptional employee already at the maximum salary for their position, they might offer a bonus as an alternative form of merit pay. Conversely, an underperforming employee who is already “overpaid” may not receive any merit increase or bonus.
In other words, don’t be disheartened if your merit increase isn’t as substantial as you expected—you might already be near the top salary for your position, as determined by the company’s HR policies.
Why Do Merit Increases Matter?
Merit increases are significant because, when implemented correctly, they benefit both employees and employers.
Some advantages of merit increases include:
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Encouraging Productivity. Employees are generally more motivated when they know their efforts will be rewarded. Merit increases incentivize productive behavior and set clear goals.
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Improving Retention. Employees who feel appreciated for their contributions are more likely to remain with the company, ultimately reducing hiring and onboarding costs.
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Creating Accountability. When employees know their work is being evaluated for financial rewards, they tend to take greater responsibility for their actions, holding both themselves and their employers accountable.
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Clarifying Roles and Responsibilities. Merit increases help define what needs to be accomplished to achieve exceptional performance, enabling employees to understand how to exceed expectations.
Keys to an Effective Merit Increase Policy
Merit increases can effectively reward top employees and motivate everyone to perform their best. However, they are only effective if a company establishes clear metrics for evaluating performance.
Companies should start by aligning their overarching goals and breaking them down into departmental objectives. Department heads must then communicate how performance will be measured and what employees must do to qualify for a merit increase. This process has three essential elements for success:
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Transparency. Employees must know the criteria used to evaluate performance and determine merit increases. Lack of transparency can lead to confusion about task prioritization necessary for earning a merit increase.
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Standardization. Management should implement a consistent system for merit increases. A standardized process provides employees with a clear and reliable path toward earning a merit increase.
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Continuity. Annual performance reviews may not provide sufficient opportunities for employees to adjust their performance. Employers should offer ongoing feedback to help employees align their priorities with broader company goals.
What Is a Standard Merit Increase?
On average, the typical merit increase offered by firms is around 3%. The size of your merit increase may vary by department and its significance in achieving the company’s overall objectives. An employee’s current salary relative to the salary range for their position also plays a role.
An employee whose salary is already at the maximum may receive a bonus instead of a merit increase. If you’re unsure about how your company handles merit increases, don’t hesitate to ask during the interview process or while employed.
Research indicates a notable disparity in merit increases between average and top-performing employees. According to the Society for Human Resource Management (SHRM), based on data from consultancy Willis Towers Watson, 90% of organizations utilize individual performance ratings to determine salary adjustments.
The study revealed that companies rated an average of 11.7% of their employees with the highest possible rating, 33.1% received an above-average rating, 58.2% were rated average, and 5.2% were rated below average.
Employees given the highest rating received an average salary increase of 4.6%, while those rated above average received a 3.6% bump. Average-rated employees received a 2.7% increase, and below-average employees received only a 0.7% increase. In effect, top performers received an average raise that was 70% larger than that of average employees.
If your company offers smaller merit increases than those mentioned, don’t panic. Organizations have multiple ways to reward excellent performance, including additional benefits like extra paid vacation or other perks.
For salary-capped employees, a bonus can serve as a one-time financial reward as valuable as a merit increase.
Merit Increase vs. Pay Raise
Merit increases are a specific type of pay raise contingent on meeting defined criteria. They rely on assessments from managers and team leaders regarding employee performance.
This method distinguishes merit increases from Cost of Living Adjustments (COLAs), which are influenced by inflation rates rather than performance metrics. They also differ from arbitrary raises tied solely to an employee’s tenure at the company.
Although companies have some flexibility in awarding merit increases, the established metrics and requirements dictate the size of an employee’s raise. This system enables organizations to provide competitive salaries based on both market and internal values.
Ultimately, employers must clearly communicate their objectives and the performance metrics they use to evaluate each employee. Employees should recognize that substantial merit increases are reserved for those who meet or exceed expectations, fostering motivation to perform at their highest level.
While companies typically grant annual pay raises and COLAs irrespective of performance, merit increases are awarded only to those who actively contribute to the firm’s goals. This approach cultivates a culture of healthy competition, enhances retention of top talent, and strengthens the overall workforce.
How to Get a Merit Increase
Hard work pays off; therefore, maximizing your potential is the first step toward earning a substantial merit increase. In addition to hard work, follow these steps to enhance your chances of securing a merit increase.
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Study the Rules. Familiarize yourself with your company’s merit increase policies through your employee handbook or discussions with your manager or HR representative. Understanding your company’s performance expectations is critical for positioning yourself for a merit increase.
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Reflect on the Past. When prioritizing your efforts, review past feedback to identify metrics you’ve met and areas for improvement, and understand how these metrics align with company guidelines for merit increases. This will help you set aligned goals.
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Document Your Achievements. While companies should have systems in place for measuring success, keeping a personal record of your accomplishments can be beneficial.
You are your best advocate, so ensure your supervisors are aware of your achievements. When performance reviews occur, your contributions will be fresh in their minds.
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Monitor Competitors. To ensure your company’s merit increase structure is fair and competitive, observe how similar organizations manage their merit increases.
If you discover that your raises are lower than those of competitors, use this information to advocate for changes, whether for structural adjustments or for your own merit increase if you are a top performer. If a significant raise isn’t forthcoming, consider exploring opportunities at companies that offer more competitive compensation.
Merit Increase FAQ
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What is a merit increase in salary? A merit pay increase, or merit increase, is a pay raise based on a specific set of guidelines established by the employer. In a pay-for-performance structure, employees who exceed management’s expectations are eligible for salary increases at predetermined review intervals, often quarterly.
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Is a 5% merit increase good? The average pay raise typically ranges from 3% to 4%, making a 5% merit increase quite favorable. While a 5% bump might seem modest, these incremental changes accumulate over time.
For instance, an individual starting with a $50,000 salary who receives a 5% annual increase will see their salary rise to $63,814 after five years, resulting in a more than 25% overall increase.
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Is a merit increase a raise? Yes, a merit increase is a type of raise. It does not require you to take on additional responsibilities, so it does not equate to a promotion. This increase is a permanent addition to your salary, distinguishing it from a bonus.
Like all raises, merit increases depend on the company’s budget, departmental success metrics, and your value both in the marketplace and within the organization.
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What constitutes a good merit increase? The definition of “good” varies. Generally, anything above 3% to 4% can be considered favorable.
However, a more comprehensive evaluation involves regularly assessing your market value. You don’t need to be constantly seeking new jobs, but staying informed about industry compensation trends will help you determine what constitutes a “good” salary for your role.
Ultimately, ensuring that your overall compensation is equitable is most important, rather than focusing solely on the percentage increase from your previous salary.
Author
Matthew Zane is the lead editor of Zippia's How To Get A Job Guides. He is a teacher, writer, and world-traveler that wants to help people at every stage of the career life cycle. He completed his masters in American Literature from Trinity College Dublin and BA in English from the University of Connecticut.
