Merit Increase vs. Promotion: Know the Difference to Avoid Pay Confusion
HR professionals often struggle to communicate salary changes clearly—especially when performance reviews, job title changes, and annual increases collide. Knowing the difference between a merit increase and a promotion is critical for maintaining employee trust and managing expectations.
Merit Increase Vs. Promotion: What’s the distinction?
What Is a Merit Increase?
A merit increase , also known as a merit raise, is a pay bump based on an employee’s individual contributions. Unlike general raises for cost-of-living or company performance, merit increases reward exceptional job performance. They’re often used to:
Key Benefits of Merit Increases:
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Boost retention and engagement
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Signal performance-based rewards
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Support competitive employer branding
However, merit increases are often misunderstood. Not all raises are merit-based. A cost-of-living adjustment (COLA), for example, has nothing to do with performance and everything to do with inflation or market pressure.
A merit adjustment may even result in decreased pay in rare but warranted cases, such as sustained underperformance.
What Is a Promotion?
A promotion typically involves a change in title, role scope, or organizational level. It often—but not always—comes with a salary increase.
Promotions can be driven by:
Sometimes, lateral promotions (a change in role but not pay) are used to help employees gain new skills or broaden their experience. This can be strategic for career pathing and retention.
If a promotion coincides with your annual merit cycle, ensure both a merit and promotion pay adjustment are applied independently to avoid underpaying top talent.
When dealing with both merit increases and promotions, emphasize transparency.
Big changes—especially when they affect a person’s pay, for better or worse—come with big emotions. Often, these emotions make their way into the workplace in the form of confrontations and difficult questions, especially when the news isn’t what they were hoping for.
We advise every client we consult with to adopt a policy of honesty and transparency.
If an employee receives a merit increase, he or she should know exactly what they did to earn it. Similarly, if an employee only receives a modest increase when they were expecting a larger one, it’s important to provide at least a few solid reasons why that happened.
It’s much more helpful to both the employee and the company if you give a direct answer, such as:
“We’re still being affected by supply chain issues. You’re doing a great job, but until economic conditions improve, this is the best we can do.”
Avoid a vague dismissal along the lines of:
“It’s not the best time right now.”
The first answer shows the employee that the less-than-expected increase is not their fault, and that their pay is being affected by powerful external factors beyond the company’s control.
The second answer is frustrating and appears as if the company just doesn’t care.
Similarly, it’s a good idea to explain to the team why a particular employee received a merit increase or a merit-based promotion, such as:
“We’re happy to recognize Amanda for her incredible work these past few months.”
This signals to other employees that the same reward could be in store for them if they put in the effort. This is a far better option than avoiding an explanation and letting resentment toward Amanda slowly build because no one understands why she alone received a mid-year raise.
At MorganHR, we understand that having these conversations isn’t easy. If you or your company’s managers often get hit with questions like, “Why am I making the same amount as our entry-level accountants?” or “Why is my raise only 1% this year?” consider our Compensation Conversation Training program. It’s purpose-built to help managers and HR leaders communicate effectively in a way that’s best for everyone when a tricky situation occurs.
Keep salary calculations simple after merit increases and promotions with expert help from MorganHR.
Calculating an employee’s new salary is by far the most time-consuming part of working with merit increases and promotions. Unfortunately, this means you’ll be spending the bulk of your effort trying to keep up with tedious details when an employee is up for an adjustment of one kind or the other.
As we’ve mentioned, a number of factors can influence an employee’s final salary number after they’ve received a raise, a negative adjustment, or a promotion:
- The employee’s experience and training level
- The employee’s performance
- How long the employee has been with the company
- Salary levels for comparable positions in other companies
- How the organization weighs certain performance categories
- Cost of living in the local area
- What the company can afford to budget toward salaries
If you keep track of these factors manually, on paper or with a spreadsheet, you’ll never stop updating the information. In fact, by the time you finish calculating pay changes, the information you used as a basis for your calculations might already be outdated.
It’s far better to pre-plan these major moves with tools such as SimplyMerit from MorganHR.
SimplyMerit automatically keeps track of any adjustments to employee status, training, and job descriptions, so the foundations for your calculations are already at your fingertips when you need them.
MorganHR offers far more than tools, however. Our expert consultants can help you transition from the paper-and-pencil method to a more automated solution, develop a streamlined approach for salary calculations that works in your business environment, and guide you through the process of navigating tricky conversations with employees around compensation issues.
Contact MorganHR to start simplifying your compensation processes.
