Tips for modernizing merit

In recent years, merit and annual increase budgets have inched closer to their pre-pandemic norms. Many employers across Canada are facing the same challenge again this year: making a 3%-3.5% budget increase meaningful for a diverse group of employees.

For quite some time, compensation and total rewards professionals have recognized that the traditional merit process isn’t delivering the results it once did. Between tight budgets that make it difficult to reward high performers thoughtfully, minimal impact on take-home pay, and unclear connections between pay decisions and performance, organizations are searching for new ways to make the process more effective and engaging.

It's time to examine how merit is handled and how a modern approach can improve it for both employees and employers.

Defining a merit increase

A merit increase is a pay adjustment that rewards an employee for past performance, contributions, and goal achievement. Typically, the amount of the merit increase depends on two factors: the employee’s performance rating and their current position within the pay range for their role.

Every job has an established value within an organization, and budgets are fixed. Because of that, merit increases are often distributed strategically rather than uniformly.

It’s also worth noting how merit increases differ from other pay adjustments. For example, market adjustments align pay with market benchmarks, equity adjustments address internal pay fairness, cost-of-living adjustments (COLAs) help employees keep up with inflation, and promotional increases accompany a move into a higher-level role.

Merit increases are unique because they are tied directly to performance review outcomes, making them an essential component of the annual review process.

What does the merit process involve?

A modern merit process extends well beyond pay. It evaluates performance, provides feedback, and recognizes contributions through various financial and other rewards.

These rewards might include career development opportunities, greater flexibility, project leadership, or new work arrangements that reflect employees' values. All of these contribute to the overall employee experience and play a role in engagement and retention.

The merit process also includes the behind-the-scenes elements that make the annual review cycle run smoothly: planning, administration, and communication. Each step offers an opportunity to strengthen trust and alignment between leadership, managers, and employees.

Here are five practical ways to modernize your merit process.

1. Build transparency into your strategy

Transparency has become one of the most critical aspects of modern performance and pay management. Today’s employees and job seekers want to understand how compensation decisions are made. They expect clarity around salary ranges, performance expectations, and the connection between performance and pay.

Ensure your organization has a clear and consistent < a href="https://www.imercer.com/ca/ARTICLEDETAIL/understanding-job-architecture-canada">job architecture to meet this expectation. Each role should have a well-defined description as an associated pay range. This structure helps employees understand where they stand and what’s required to advance.

Equally important is explaining how merit increase decisions are determined. Share the factors considered, such as performance rating and position range, along with who makes the decisions and how budgets are allocated. Whether your approach is rule-based or manager-driven, being transparent helps build trust. When employees understand the “why” behind their compensation, it supports fairness, enhances engagement, and reinforces your organization’s culture.

2. Simplify the merit cycle through data and technology

One of the most significant barriers to effective merit management is inefficiency. Outdated systems, manual spreadsheets, and complex processes slow things down and can introduce bias or inconsistency.

Modernizing your merit cycle means using data and technology (such as Mercer’s PayAI™️) to make informed, efficient rewards decisions. Automated tools can simplify performance tracking, reduce administrative burdens, and provide data-driven insights that help allocate limited budgets strategically.

For instance, compensation benchmarking platforms and AI-powered tools can analyze pay equity, flag potential inconsistencies, and forecast the impact of different merit scenarios. These systems also create a consistent framework for evaluating employee performance across departments. When data and technology work together, organizations can ensure their merit process is faster, fairer, and more accurate.

3. Connect merit to career development

Today’s workforce strongly emphasizes growth and development. Employees want to see their hard work and performance translate into more than just an incremental raise.

Align your merit strategy with career development opportunities to create a more meaningful link between the performance review process and long-term engagement. This could include upskilling programs, mentorship initiatives, and personalized development plans.

Consider how each employee’s performance ties into their career trajectory. Are high-performing individuals given opportunities to lead projects to acquire new skills? Do managers discuss development goals during the annual review?

When employees can see how their performance and pay tie into future opportunities, they view merit decisions not just as a one-time evaluation, but as part of an ongoing conversation about their potential. That sense of progression can significantly increase motivation and retention.

4. Distinguish performance and reward high performers fairly

Many organizations fall victim to giving across-the-board increases that don’t truly distinguish between varying performance levels. While this may seem fair on the surface, it can weaken the impact of your merit process.

To truly modernize, differentiation is key. Develop a structured yet flexible framework that allows managers to reward high performers appropriately while maintaining internal equity.

This doesn’t necessarily mean spending more. It means allocating existing budgets more effectively. For example, top performers could receive larger merit increases, while others might receive smaller increases paired with targeted development plans.

In addition to pay, consider non-financial rewards such as recognition programs, stretch assignments, or extra flexibility. These cost-effective tools can deliver just as much motivation as a larger pay increase.

The goal is to ensure that your merit increase decisions reflect genuine differences in contribution and performance, reinforcing the message that excellence is noticed and rewarded.

5. Create a communication plan that builds trust and engagement

Even the most well-designed merit process will fall short if it isn’t communicated clearly. Transparent, consistent communication is essential for building confidence in how your organization manages pay and performance.

Start by equipping managers with the right tools and language. They should be able to explain the performance review process, how merit decisions are made, and how employees can influence future outcomes.

Communication should be ongoing, not a one-time conversation during the annual review. Encourage managers to provide regular feedback throughout the year to ensure employees aren’t surprised by their evaluations.

Use multiple channels to gather feedback and ensure the process works as intended. This can include internal newsletters, town halls, and employee surveys. Active listening helps your organization adapt and improve its approach over time. Employees who feel informed and heard are more likely to trust the process, even when budget limitations mean modest pay increases.

Equip managers to lead the merit process effectively

Even the best-designed merit process can fall short without strong managerial support. Managers play a central role in ensuring that merit decisions are fair, consistent, and clearly communicated. Yet many managers feel unprepared to handle compensation discussions or provide the kind of feedback employees need to grow.

Investing in manager training can have a significant impact. Equip them with the knowledge and tools to assess performance accurately, understand pay structures, and make informed merit decisions. Encourage sessions where managers can review merit recommendations collectively to ensure alignment across departments. This not only promotes fairness but also helps maintain internal equity.

Managers should also be given clear talking points and resources for communicating merit outcomes. When leaders can confidently explain how performance review results tie into a merit increase, it strengthens trust and helps employees see the process as transparent and objective.

By empowering managers to lead these conversations effectively, you create a more consistent employee experience where people feel recognized, valued, and supported in their growth.

See modernization as a strategic opportunity

Modernizing your merit process isn’t just about updating old systems. It’s a strategic opportunity to align pay practices with your organization’s values and culture. By fostering transparency, streamlining workflows with data, integrating career development, differentiating performance, and strengthening communication, you can transform your annual review cycle into an incredible employee experience.

The result? A merit process that motivates, retains, and empowers people while supporting goals.

Start today by reviewing your current merit process and identifying one or two areas for improvement, whether introducing new technology, training managers, or increasing transparency. By implementing these best practices, Canadian organizations can make the most of limited merit budgets, create a stronger sense of fairness, and ultimately build a more engaged and productive workforce.

Want to learn more about modernizing your merit process? Let Mercer help. Contact us at 855-286-5302 or email us at surveys@mercer.com.