Merit Increase

A pay raise awarded based on an employee's individual performance, typically tied to the annual review cycle.

A merit increase is a salary raise given to an employee based on their job performance — as distinct from cost-of-living adjustments, which apply broadly regardless of individual contribution. Merit increases are typically determined during an annual review cycle, where managers assess performance against goals and recommend raises within a budget allocated by HR.

The size of merit increases is usually expressed as a percentage of base salary and varies by performance rating, company budget, and market conditions. In strong economic environments, merit budgets typically range from 3–5%; in downturns, budgets can be frozen entirely.

How Merit Increases Are Determined

  • Performance rating — your manager's assessment compared to peers and against predefined expectations.
  • Compa-ratio — how your current salary compares to the midpoint of your pay band; employees below midpoint often receive larger increases.
  • Manager recommendation — proposed during a calibration meeting with HR and peer managers.
  • Budget constraints — even strong performers may receive below-target increases if the department budget is constrained.
  • Position in band — high performers near the ceiling of their pay band may be pushed toward promotion instead.

Merit Increase vs. Promotion Raise

A merit increase is a raise within your current role and pay band. A promotion raise reflects a change in title and level, typically carrying a larger increase — often 10–20% — as the employee moves into a higher band. Strong performers who hit the ceiling of their current band may be told that further compensation growth requires a promotion rather than another merit increase.

When to Negotiate a Merit Increase

Merit increases are often treated as final decisions handed down by HR, but they can be negotiated — especially if you received an 'Exceeds Expectations' rating, took on significant additional responsibilities, or have external market data showing you're underpaid. The best time to make the case is before the review cycle ends. Present specific accomplishments, market data, and a specific number.

Example

During her annual review, a product manager receives an 'Exceeds Expectations' rating. Her company's merit budget is 4%, with a range of 2–7% based on rating. She receives a 5.5% merit increase, bringing her base from $130,000 to $137,150.