Easy to implement practices to more efficiently implement impactful merit increases

In the past several years merit and annual increase budgets have moved closer to pre-pandemic levels. This year is expected to be more of the same – figuring out how to make a 3-3.5% budget meaningful to a diverse employee population. For some time, total rewards experts have indicated that the typical merit process is not working. The challenges range from budget sizes that make differentiation for high performers difficult, the limited impact on an employee’s paycheck, the disconnect between increases, pay in general, and how managers communicate performance to employees, among other things.

What is a merit increase?

A merit increase is primarily a pay increase to reward an employee’s past performance and achievement of goals and objectives. Typically, the size of a merit increase is determined based on a ranking or grading of an employee’s performance as well as how much they are paid currently, since every job has a determined value to the company and budgets are limited. How is a merit increase different from any other type of pay increase? Other types of pay increase, that differ from merit increases, include market adjustments, equity adjustments, cost of living adjustments or “COLAs”, or promotional increases. The biggest difference is that merit increases tend to be tied to some assessment of performance.

What is the merit process?

The merit process goes beyond just pay. It consists of evaluating employee performance and then considering what rewards they should be provided. Beyond pay that includes, career development opportunities, promotions, flexibility, preferred work arrangements and projects as well as other things that can be seen as beneficial to the employee experience and, thus, engagement.

Additionally, when considering the merit process consider about the planning, administration and communication around the annual activity.

Thinking beyond merit pay increases themselves, let’s take a look at five tips to modernize your merit process.

Tip 1: Make transparency a strategic foundation

Transparency in compensation and performance management is no longer optional—it’s a competitive advantage. Your employees and job applicants expect to understand salary ranges and the criteria behind compensation decisions. To meet this expectation, start by clearly communicating a clear job architecture and job descriptions tied to pay ranges. This helps employees understand how their compensation is determined and builds trust between your leadership and workforce.

In addition, communicate how merit increase decisions are made. Let employees know what is considered (e.g., rating and position in range) when determining the size of a merit increase, who is making the decisions, whether or not there are guidelines/rules or full discretion, and the overall budget.

Establishing this level of openness not only supports compliance but also strengthens your organizational culture.

Tip 2: Streamline the merit cycle using data and technology

Reduce inefficiencies caused by outdated merit processes by embracing modern tools and technology. Complex, lengthy, and biased pay systems can hinder equity and slow decision-making. Instead, integrate platforms that enable reliable compensation benchmarking, automated decision support, and transparent performance tracking. Leveraging artificial intelligence (AI), such as Mercer’s PayAI™ can provide predictive insights and identify patterns that improve your merit decisions. Finding the right tools and communication mechanisms is critical to making your merit cycle more efficient and fair.

Tip 3: Prioritize individual career development

Employees today focus heavily on career growth and progression within your organization. Align merit-based rewards with meaningful career development by emphasizing skill-building, mentorship programs, and clear advancement paths. Evaluate employee skills and experience regularly, factor these into your rewards decisions, and communicate how performance ties into future opportunities. By making career development a core part of your merit process, you help employees see their evaluations as stepping stones to personal and professional growth, which boosts motivation and retention.

Tip 4: Differentiate performance to reward high achievers

Avoid defaulting to across-the-board pay increases that dilute the merit process and fail to recognize top performers. Instead, ensure your merit increases reflect true performance differences. Develop a tailored evaluation approach that balances objective metrics with managerial feedback. Use differentiation strategies such as tiered recognition programs and nonfinancial rewards to motivate employees to continually improve. Establish clear merit criteria tied to measurable goals and organizational values to create a system perceived as fair and motivating.

Tip 5: Develop a communication strategy that drives engagement

Effective communication is the backbone of a modern merit process. Provide employees with clarity on why merit-based decisions are made and how they align with broader organizational objectives. Equip your managers not only with tools but also with the soft skills needed to deliver developmental and action-oriented feedback. Make communication an ongoing effort rather than a one-time event. Use employee listening tools and feedback systems to ensure your workforce feels heard and to gauge how well your communication strategies are working. Listening actively is critical to maintaining effective communication.

See modernizing as an opportunity

Modernizing your merit process is more than just compliance or updating old systems—it’s a strategic opportunity to better align employee performance with your organizational values. By fostering transparency, leveraging data and technology, supporting career development, differentiating performance, and committing to clear communication, you can transform your merit cycle into a powerful tool for boosting productivity, engagement, and long-term growth.

Start implementing these best practices today to create a merit system that serves both your employees and organizational goals equally well.

Mercer is here to help: call us at 855-286-5302 or email at surveys@mercer.com.