Optimizing Your Merit Cycle Process: 7 Tips For HR Pros Posted on June 6, 2023 (October 24, 2023) by Laura Morgan Is your company’s merit cycle process causing manager headaches and employee frustration—and even attrition? If your company leaders, HR team, and departmental managers aren’t aligned on their merit pay philosophy, strategy, and communication, there’s a high chance you’ll face trouble from managers and employees soon (if you aren’t already). A merit cycle—sometimes called a salary review or salary increase cycle—is the managerial process of reviewing employees’ salaries in order to allocate fair and equitable salary increases. For many in the HR world, the merit cycle is a convoluted process. First, there’s no real industry standard, so when managers and leaders switch companies, they tend to adopt their previous employer’s way of doing things, which may or may not be how their current employer does it. Second, many leaders believe managers know the merit cycle process philosophically and can verbalize it to employees when in fact, they can’t. Third, most companies’ merit cycles tend to suffer from a general lack of structure and transparency. All these things lead to a muddy merit cycle and dissatisfaction on everyone’s part—which could potentially cause your most valued employees to eventually leave the organization. But it doesn’t have to be that way! Fortunately, there are steps you can take to improve your company’s merit increase process, which will lead to happier employees and a better bottom line. Keep reading to learn what works best. Want expert advice on how to develop a merit cycle that’s consistently fair and transparent? Ask MorganHR—just give us a call to see how we can assist. 7 Tips To Improve Your Company’s Merit Cycle Process 1. Clarify your organization’s philosophy for merit pay. At the highest level, there needs to be a philosophy for merit pay: What’s the rationale behind how your organization (leadership and management) sets pay? Questions to consider include: What do you value more: benefits and retirement or high salaries? Do companies provide employees with an incentive plan that provides significant rewards or a more frequent payout? If so, perhaps the base salary is meant to keep consistent to market versus incentivizing performance. Also, merit increases mean different things to different companies. Some increase salaries purely based on performance, while others increase salaries to address pay placement and equity issues. You need to make this determination and then communicate that message to all managers and employees. 2. Develop a strategy for your merit budget. In addition to clarifying your philosophy, you should also develop a strategy around your merit budget. I’ve seen companies use part of the budget to address issues related to compression, pay gaps, and retention. With the recent challenges to find talent, companies were faced with hiring incoming talent at higher rates than their current teams. A key retention strategy using the merit budget might be to prioritize pay gaps with the high-performing, tenured employees to ensure solid retention. With a merit tool to monitor the manager’s decisions surrounding pay and merit increases, HR can help shape a better decision with managers to allocate more dollars from the merit budget to address these gaps and improve pay equity. 3. Communicate your merit pay philosophy, strategy, and implementation clearly and consistently. Make sure your company’s messaging regarding merit pay is consistent with your philosophy and strategy. I’ve seen HR managers download messages and philosophy statements from other companies (yikes!) and try to adopt them as their own. Not surprisingly, recycled words tend to fall flat. Employees are smart—they can sense if your company’s messaging is not congruent with your intentions. 4. Adopt technology tools that provide unbiased data on merit pay and salary. One key to employee satisfaction (and a better retention rate) is the degree of trust employees have for managers and leadership. This is especially true for HR teams, where trust and credibility around sensitive topics like pay raises and salary are crucial. Giving managers access to a tool to facilitate effective decision-making about the salary changes for their team is one way you can help them build trust. Too often, managers are forced to make compensation decisions on a spreadsheet. Software products like SimplyMerit by MorganHR empower managers with decision-making guidance they can use to make better salary decisions about pay raises. Armed with this technology, managers aren’t forced to rely on spreadsheets with a limited view of the impact of pay raise decisions for their employees, individually and equally across the company; they can more confidently run merit cycles that improve pay equity and performance alignment. 5. Provide managers with training around the merit cycle process. Leaders and HR professionals must never underestimate the value of training managers to understand and communicate the tenets of your merit cycle philosophy. Managers are the bridge between you and your employees; they will be responsible for conveying what the merit process will look like and aligning employee expectations. I’ve seen managers handle delicate situations well—for instance, when not all employees receive increases—because they were trained properly and had a good, grounded understanding of the related compensation strategies, pay guidelines, tools, and systems. Conversely, when merit pay processes change from year to year and managers aren’t trained in the process, managers are faced with a tough situation that reflects poorly on them, leadership, and the company in general. 6. Monitor employment and salary data continuously. Given the current state of the employment economy and the variety of unreliable data sources available, it’s imperative to keep your finger on the pulse of employment and relevant salary data. I advise company leaders and HR business professionals to make salary decisions for themselves in review of the data available, yet avoid simply regurgitating the salary data seen in surveys absent of contextual data pertinent to your industry and your organization. 7. Audit pay levels every year. An annual review of pay levels is crucial to ensure you’re not underpaying or overpaying roles within your company. Questions to use in your audit include: What employees may be ready for promotions to jobs that don’t yet exist? Are there employees in redundant roles with different pay levels? Do any managers have direct reports whose salaries are close to or even above that of the manager? What jobs have we hired for recently where the newcomers’ salaries are significantly higher than those of their tenured peers? My Top Recommended Resources & Tools To Assist In The Merit Cycle Process In addition to the above tips, take a look at the resources below. HR managers and business leaders can devise a more thoughtful merit cycle plan with the help of the following: Society of Human Resource Management (SHRM) and HR Executive—Both offer articles and data on all things HR-related, including merit cycles, and require a subscription to access; the cost is worth the value. WorldatWork—This is the premier resource for all things compensation, including a certification program, courses, research and tools, and membership communities to source key information from rewards experts. SimplyMerit—This is a real-time HR compensation management solution that assists leaders and managers in optimizing their merit budgets, bonus pools, and equity grants in a way that’s fair and holistic. Request a demo to see it for yourself. About the Author: Laura Morgan As a founder and owner of MorganHR, Inc., Laura Morgan has been helping organizations to identify and solve their business problems through the use of innovative HR programs and technology for more than 30 years. Known as a hands-on, people-first HR leader, Laura specializes in the design and implementation of compensation programs as well as programs that support excellence in the areas of performance management, equity, wellness, and more.