Money is a very strong motivator and a most straight-forward thank you you can give your team. If you appreciate your team, and the revenue allows it, you want to consider introducing a merit increase (also known as merit pay) in your motivation program in the workplace. What goes into a merit increase? How to earn a merit pay? This article breaks down the concept to help team leaders diversify their payroll operations and motivate employees. 

What is a merit increase in pay? 

Thanking your team for their hard work in financial terms is a powerful motivation for the people that spend their energy and time on your business. A merit increase is tied to one’s performance at work by nature, and this is where the name stems from. In contrast, a pay raise is not related to one’s performance and may be a company-wide adjustment rather than an individual measure to complement a particular employee. 

Let’s illustrate with an example. Consider Anna Caters, a software engineer at Nicrosoft, who received a 4% merit increase. Why? Thanks to her outstanding performance during the year! Anna completed projects ahead of the deadline and her clients shared some terrific feedback on working with her. Along with effective work on paying projects, Anna was also a mentor for junior developers. Last but not least, her solutions helped the company save money. So Anna learns about her increase during her annual performance review, and the 4% adjustment is added to her next year’s pay. 

Does my business need a merit increase? 

How does an HR or a CEO come to the idea that a merit increase program is necessary? Should a merit increase be a precursor of a strong team or a reactive measure after a team has proven to be a powerhouse as it is? 

The advantage of having a merit increase policy in place seems obvious. Higher employee satisfaction, better employee engagement and a stronger HR brand naturally come to any leading manager’s top of mind when they are toying with the idea of introducing the measure. But what is the true challenge? The devil is in fairness. 

Fairness to my business: can we afford a merit increase? 

It is okay and perfectly human to want to reward everyone on your team. However, it is objective data that needs to dictate whether employees will be given a merit increase and to what capacity. The more objective and varied sources you have in regards to your team’s productivity, the more likely you are to make an accurate weighted decision and introduce an effective system. 

Start by defining the true value of employees. Now, we don’t mean to say that some people don’t matter. Instead, we invite you to assess the risks entailed in case this particular employee makes a mistake or leaves. Who are they that really move the dial in terms of business performance and revenue? 

Remember we talked about data? Historical data is your best friend here  — recognition awards, peer support, 360-reviews and more. Trace back to when they have only joined the company and reflect on how far they have advanced. A comprehensive review like that will help you reconsider their performance in retrospect and understand their place in the company. 

So the data is pointing every finger at this particular employee’s critical role to your business. Now it is time to assess the extent to which their performance or inefficiency affects your company financially. The key questions to ask yourself are: 

• What’s the cost of their mistake?
• How do they influence the success of your business strategy?
• How easily can you replace them?

Disclaimer: employees that don’t earn money for the company (e.g. HR or Legal) can be effective and deserve a merit increase. But does their merit increase differentiator have to be the same as that for Sales or Business Development? 

Fairness to my employees: how do they earn a merit increase? 

A sound merit increase in place, with multiple employees that have tested it, is a serious advantage in the fierce talent market of today. Retaining employees is what helps you push through the competition as a single unit, empowered by internal intelligence. 

But how do you get there — when your team knows they are valued and have a clear path to merit increases ahead of them? Would some people oppose varying differentials across departments? 

Imagine a merit matrix as a helpful roadmap that companies use to decide how much to increase an employee’s salary based on their performance. It’s like a recipe that ensures everyone gets fair and consistent raises reflecting their input at the workplace. 

Standard Merit Matrix

A simpler form is the standard merit matrix. At its core is employee performance. The Y-axis is performance levels (commonly defined as ‘meets expectations’, ‘exceeds expectations’) and X-axis is raises, so each performance level has a dedicated raise percentage. At the end, you will have a pretty straight-forward chart: 

• Exceeds expectations: 5-7% raise
• Meets expectations: 3-5% raise
• Needs improvement: 0-2% raise

Two-Variable Merit Matrix

As can be deduced from its name, two-variable matrix considers one more factor – employee performance and position in salary range. In simple words, it aims to provide a fairer approach to merit increases, based on how much an employee earns already. 

The super power of two-variable merit matrix is that it promotes pay equity. Take Mark, a sales lead, who is at the top of the salary range. At his yearly review with an HR, he is awarded a 4% increase. In comparison, his junior John, whose salary is at the bottom of the range, is given an 8% increase. Why? The program tries to close the gap between similarly performing employees at different pay levels. 

Last but not least, avoid these common pitfalls when designing your merit increase strategy: 

• Qualifying for a merit increase is achievable. When people feel you’re asking too much, motivation disrupts. 
• Getting a merit increase should not equal working overtime. If overtime work is a prerequisite to getting the increase, then it’s not likely to work out. 
• Communicate the rules effectively. The guide on merit increase should be available to all at any time. 
• Use good old SMART goals in your program. Specific, Measurable, Achievable, Relevant, Time-bound. 

Remember: it’s not always about money 

A merit increase is a healthy add-on to your compensation plan. Yet it is not a cure-all patch for a situation where there are high turnover rates. While pay is a deciding factor, employees may be leading for other reasons, such as workplace chaos and stress, poor planning, low job security, ineffective management, etc. 

What counts towards a merit increase? 

Objective people data is the foundation of any motivation and compensation program. Information gathered from multiple channels will help you create a comprehensive review of a person’s performance at work. Look out for these inputs when crafting your merit increases logic. 

KPI. Factual ‘plan vs fact’ data points are the most unambiguous signal of one’s abilities. Rewarding for mediocre or average work results may cause more mediocre outcomes (since they are rewarded, right?). 

Training & Learning. Life-long learning is key in a successful career track. Their knowledge is your internal intelligence. Employees that invest in education should be valued. Tying merit increases to professional growth is a win-win for the business and the employee. 

Peer feedback. This kind of data comes partially from peer reviews you may have in place. Offline face-to-face discussions of employees nominated for a merit increase will also help understand their input into the team’s wellbeing. Consider this: they make 200% of their KPIs, yet the team believes they steal the credit. It is a serious game-changer that effectively alters the perspective. 

Merit Increase with EasyStaff Payroll 

Integrating an HR software, setting it up and enjoying the dashboard is great. But what if you are not there yet in terms of money? Reviewing your payroll operations may be a challenge, especially when so much happens ad hoc. Confusing payroll management, coupled with tax and compliance, may be in itself a reason to postpone any new payroll-related initiatives for your team. Now, it changes with EasyStaff Payroll. 

EasyStaff Payroll is the contractor management platform that acts as a bridge between your company and your remote team worldwide. By signing a B2B contract with the platform, your business mitigates maximum compliance risks and opens the international talent pool. The payroll processing boils down to topping up your balance on EasyStaff Payroll, and payments will be sent by the platform all over the world. For every transaction, closing documents are provided for convenient and water-tight reporting to tax authorities. 

At EasyStaff Payroll, we strive to achieve maximum efficiency for every action we make. This is why we made joining the platform only a matter of a few minutes. Your first payment to full-time staff or a one-off freelancer happens on the same day you join. We process as little as $10 per transaction. This is what it means for your business: 

• No need to worry about a schedule. You pay when you need, so any bonus or reward you decide to introduce can be distributed right away. 
• No need to wait for money to stack up. With a friendly $10 threshold, you can pay right away, whatever amount there is. 
• No need to worry about payment methods. We got you covered with crypto and regular bank wires to cards and accounts. Pay the motivational extra to your employee however you want. 

Merit Increase FAQ 

• Is merit increase basically a pay raise? Technically, both of these terms mean that there is an increase in pay. You could call a merit increase a pay raise, except merit increases happen individually and stem from individual performance rather than an objective need (e.g. to adjust for inflation or a traditional annual raise). 
• How much is a merit increase? There are some benchmarks in the market today, but normally the amount is up to a business to decide. The underlying hope is that employees will stay with you despite lucrative offers from other places where pay is higher. So, the fundamental principle can be that all your incentives add up to a maximum salary band for a given position across the market. Speaking of more concrete numbers, on average a merit increase is 3%. In contrast, Grant Thortnton’s survey back from 2021 found that of 551 senior U.S. HR leaders 51% said their organizations were expecting an average merit increase of more than 5%. A most workable answer is: a merit increase should be in line with your payroll budget and not strain it. If all you can give now is 2%, it’s fine as long as your team is taken care of in other ways. 
• What if I don’t have a budget for a merit increase but I want to introduce something similar? Sometimes you just ought to get creative in your compensation strategy. And the good news is, there are ways to avoid the financial strain: offering employees stock options, ‘short days’ on Friday for the best performers and extra paid time off may be your craft merit pay alternatives.