If you’ve ever found yourself deep in the trenches of compensation planning, you’ve likely faced the question: Should we prorate merit increases? It sounds straightforward enough, but as with most things in comp, there’s more than meets the eye. Whether you’re refreshing your merit cycle process or just looking to tighten up your pay practices, it’s worth taking a closer look at the advantages and disadvantages of prorating merit. Let’s break it down.

What does it mean to prorate a merit increase?

Prorating a merit increase means adjusting the amount based on how long an employee has been in their role or with the company during the performance period. For example, if someone joined halfway through the year, instead of giving them the full merit increase that someone with 12 months under their belt would get, you’d give them half. Sounds fair in theory, right? But as you’ll see, there are some real trade-offs to consider.

The case for prorating

Let’s start with why you might want to prorate. There are some solid reasons this approach can make a lot of sense:

1. It feels fair to longer-tenured employees

Your tenured employees have been grinding all year. They’ve delivered results, lived your values, and supported the business through thick and thin. Prorating helps make sure someone who only joined a few months ago doesn’t receive the same increase as someone who’s been pulling their weight for the full cycle. That kind of fairness, as long as it is communicated, can go a long way with your workforce.

2. It protects the budget

If your merit pool is tight (and let’s be real, when is it not?), prorating can help you stretch your dollars further. By allocating increases based on time worked, you avoid overspending your pool just because of a growing headcount late in the year. That kind of budget control can help you stay within guidelines without a ton of manual gymnastics.

3. It encourages consistency and process discipline

Prorating can help reinforce the policy that performance is evaluated over a full cycle, not just based on recency bias or hiring date luck. When you’re clear that increases are tied to contributions made over time, you build more structure and fairness into your comp philosophy. Plus, when done well, prorating creates a repeatable system that’s easier to manage across cycles.

4. It sends a signal about expectations

When you prorate, you’re also communicating that rewards are earned over time. That might help set realistic expectations for new hires, especially if you’re hiring into roles with steep learning curves. Instead of expecting a full increase right away, they understand they’ll earn more as they ramp up and prove themselves.

The case against prorating

But before you start building a bunch of spreadsheets, let’s take a look at the alternative. Prorating isn’t always the slam-dunk it seems, and you may run into a few snags:

1. It can undercut engagement for new hires

Put yourself in a new hire’s shoes. You’ve just joined, you’re working hard, you’ve already made an impact—and then you find out your merit increase is getting docked because you haven’t been around long enough. That can feel like a hit to morale, especially if no one explained the policy upfront. Prorating without communication can leave people feeling undervalued.

2. It adds complexity to the process

If your merit process is already challenging, adding another layer of calculations doesn’t help. You’ve got to track start dates, manage proration formulas, and explain the outcomes to managers (who may not love the extra math). It’s one more discussion item added to Q&A, and one more potential headache if your systems aren’t built to support it.

3. It doesn’t always reflect actual contribution

Tenure isn’t always the best proxy for impact. You may have someone who joined mid-year and crushed it—and someone else who’s been around all year but just coasted. A blanket proration policy doesn’t account for nuance, and it can create friction when top performers who are newer to an organization don’t feel recognized.

4. It can create pay gaps that are hard to close

Sometimes a small reduction in merit increase in the near term may turn into a bigger compensation planning issue later. If you prorate merit increases year over year for employees who move internally or join mid-year, they can start to fall behind their peers. That can create equity issues down the road and may eventually require more expensive market adjustments.

Finding the right approach for your organization

So, should you prorate merit increases? Well, like most comp questions, the answer is, “It depends.” Here are a few things to think about as you weigh your options:

1. What’s your culture and philosophy?

If your company leans heavily on pay-for-performance and clear ROI for rewards, prorating might align well. If you’re more focused on retention and engagement, you may want to lean toward full increases, especially for new hires you’re trying to lock in and motivate.

2. How big is your budget (and your team)?

Smaller teams and tighter budgets may need the precision of prorating to keep things balanced. But if you’ve got more flexibility in your pool, you may decide the simplicity and goodwill of giving full increases is worth the investment.

3. What are your systems capable of?

Let’s be honest—if your comp tools or HRIS can’t handle proration cleanly, it might not be worth the effort. Manual workarounds can introduce errors and inconsistencies that do more harm than good. If you do go this route, make sure you’ve got the right infrastructure in place.

4. Are you communicating clearly?

Regardless of your decision, how you explain it matters. If you decide to prorate, make sure your managers understand the rationale and can communicate it sufficiently to their teams. And if you skip prorating, be ready to talk about how your increases reflect performance and potential, not just time served.

Alternatives to traditional prorating

Not sold on a full prorating approach? You’ve got options. Here are a few hybrid models we’ve seen work:

1. Set a cutoff date

Only prorate for employees who joined after a certain point in the year (say, Q4). This keeps things simple and avoids dinging people who were here for most of the cycle.

2. Use manager discretion within guidelines

Give managers a framework (e.g., new hires should typically receive 50%–75% of the merit range) but let them adjust based on performance and impact. Just be sure you’ve got checks in place to ensure fairness and avoid bias.

3. Separate merit from market adjustments

If you’re worried about compounding pay gaps, consider separating merit increases from market adjustments. That way, even if a new hire gets a smaller merit bump, their pay can still be brought to market levels as needed.

4. Pay a one-time bonus instead

If you want to reward new hires without complicating base pay, consider a one-time lump sum for high performers who joined late in the year. It can recognize impact without locking you into a long-term base increase.

Making the decision for your organization

At the end of the day, prorating merit increases is one of those decisions that requires balancing fairness, efficiency, and your broader pay philosophy. There’s no one-size-fits-all answer, but taking the time to evaluate your options (and pressure-test them with your stakeholders) is worth it.

As a Comp Manager or Director, you’re in a key position to shape how your organization rewards performance. Whether you decide to prorate, skip it, or land somewhere in between, your approach should be grounded in clarity, consistency, and—above all—respect for the people behind the numbers.

And if you're ever feeling stuck, remember: you’re not alone. Every comp professional wrestles with this question at some point. The good news? There’s always room to test, tweak, and evolve your process. Your team (and your sanity) will thank you for it.

Looking for more helpful tips? Browse through our blog articles or give us a call at 855-286-5302 and an associate can point you in the right direction.

About the Author

James King, Principal

James is a Principal in Mercer’s Career business in Dallas, TX. He assists clients with talent strategy, workforce management, broad-based compensation, and sales compensation.