A merit increase is a salary raise that rewards employees for strong performance.
Think of it as your way of saying “you crushed it this year” with actual dollars attached. Maybe someone exceeded their goals, stepped up to lead when you needed them, or learned new skills that made your whole team better.
Most companies handle these during annual reviews—that time of year when you sit down and figure out who’s really moving the business forward. Merit increases aren’t just about being fair. They’re about keeping your best people from taking calls from recruiters. They’re about showing your team that great work doesn’t go unnoticed.
When you tie pay to performance, something interesting happens. People do more than just show up. They start showing up with ideas, solutions, and the kind of energy that makes everyone around them better. That’s when you know you’re doing merit increases right—when they stop being just a line item in your budget and start being part of how you build a company people actually want to work for.
Merit increase vs. other types of pay increases
There are numerous reasons for increasing employees’ pay. Merit increase is just one of many, as the table below illustrates:
| Type of increase | Purpose | Basis |
|---|---|---|
| Merit increase | Reward performance | Employee-specific results |
| Cost-of-living adjustment | Offset inflation/cost increases | Economic indicators |
| Promotion raise | Reflect a new role or responsibilities | Change in title or function |
| Market adjustment | Align pay with current market rates | External benchmarking |
Employers often use a combination of pay increases as a part of their compensation strategy.
What smart companies do with merit increases
Most companies tackle merit increases once a year—usually when HR and finance lock themselves in a room to figure out the merit budget. Someone inevitably asking “but can we actually afford this?” It’s that annual dance where you balance wanting to reward your people with the reality of what’s in the bank.
There’s no magic formula for setting your merit budget—every company figures out its own recipe. Some years, you’re hitting every target and the talent market’s on fire, so you bump up the budget to keep pace. Other years? You’re watching competitors throw money around while you’re trying to be responsible with cash flow.
The balancing act usually comes down to three things: how well you did this year, what everyone else is paying (because your employees know), and what it’ll take to keep your best people from jumping ship. It’s part art, part science, and definitely part educated guessing. The Society for Human Resource Management (SHRM) reported that merit increases for 2025 are expected to rise by 3.3%. This is the same increase as 2024, even though employers expressed “fewer concerns about attracting and retaining talent” in 2025.
While determining the budget for merit increases, HR and finance teams also evaluate employees’ performance against established criteria, such as performance review outcomes and data from employee rating systems. To be fair, merit increases must be based on objective information about an employee’s accomplishments throughout the year.
Notably, merit increases that are not based on data but on managers’ impressions tend to be biased. “The ‘paradox of meritocracy’ reveals that when managers believe that their organization strongly values merit, they tend to see themselves as objective and unbiased,” wrote the authors of an article published in the MIT Sloan Management Review. Due to these beliefs, they may “unknowingly favor those who fit traditional norms” over those who do not.
Why offer merit increases to employees?
When you reward great work with real money, people tend to keep doing great work. Shocking, right? But it goes deeper than that. Your top performers? They’re getting LinkedIn messages every week from recruiters promising better pay. A well-timed merit increase is often the difference between “thanks, but I’m happy where I am” and “tell me more about this opportunity.”
The math is simple—keeping your best people costs way less than replacing them. And nothing says “we value what you bring” quite like backing it up with their paycheck.
“Longitudinal data from 2022 to 2024 show that well-recognized employees are 45% less likely to have turned over after two years,” according to Gallup. Retaining talent is good business: Employee turnover is expensive for organizations, not to mention time-consuming.
Smart companies know merit increases are just one tool in the toolkit. Sure, the raise matters—but so does the shoutout at the all-hands meeting when you tell everyone how Sarah saved that major client. Or when you surprise your top performer with an extra week off because they’ve been putting in the miles.
Mix it up. Maybe it’s a merit increase plus a spot bonus for that project that kept everyone up at night. Maybe it’s the raise plus first dibs on that conference in Barcelona everyone wants to attend. The point is this: people remember how you made them feel valued, not just what you paid them. And when you get the combination right? That’s when they stop taking those recruiter calls altogether.
Getting merit increases right
- Establish metrics. Establish clear performance metrics in advance. That way, employees understand which standards they will be measured against and the weight of each one.
- Train managers. Train managers to deliver feedback and evaluate performance fairly and objectively. Research has shown that unconscious biases affect managers’ perceptions of employees’ performance.
- Use compensation bands. A compensation band is a pay range set for a specific job role or level within an organization’s structure. This range establishes the minimum and maximum salary that can be offered for a position, ensuring consistency and fairness in compensation decisions. In the context of a merit increase, compensation bands help guide how much an employee’s salary can be adjusted based on performance.
- Document and align. A documented merit increase process helps organizations standardize how they are awarded, which reduces the risk of bias or discrepancies between managers and departments and provides a clear record that can be referenced if questions or disputes arise. Aligning merit increases with regular pay equity reviews allows organizations to promptly identify and address any pay gaps.
- Communicate with employees. To build trust, merit increase policies must be communicated clearly and consistently to employees. They should feel welcome to ask questions and seek clarification about policies and decisions from their managers and HR.
FAQs
When should a company give a merit increase?
Typically, during annual performance reviews. But some companies offer quarterly or semiannual evaluations tied to smaller merit raises.
How much should a merit increase be?
Common increases range from 3% to 5% for strong performers. Top-tier talent may receive 6%+ depending on company budget and benchmarks.
Do merit increases need to be formalized in policy?
Yes. A formal policy promotes consistency, transparency, and legal compliance, especially in multi-country teams.
Can remote or international employees receive merit increases?
Yes. However, merit increases must align with local compensation norms and labor laws, especially when managed through an Employer of Record (EOR).
Ready to reward your global team the right way?
Here’s the thing about merit increases when your team spans continents: what’s competitive in Copenhagen isn’t the same as Cairo. And don’t get us started on the compliance maze of adjusting salaries across different countries.
That’s where Pebl comes in. Our Employer of Record (EOR) solution handles payroll and employment in 185+ countries, which means you can give that developer in Dublin or designer in Delhi the raise they deserve—without accidentally breaking local labor laws or messing up their taxes. We’ve already figured out the compliance piece, so you can focus on the fun part: rewarding great work.
Want to build a global team where top performers actually stick around? Let’s talk about how to make merit increases work everywhere you hire.
This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
© 2025 Pebl, LLC. All rights reserved.
