As an HR leader, a large part of your job consists of determining how much employees in your company are paid. You’re probably all too aware that the factors influencing a person’s pay can fluctuate constantly.
Assigning an appropriate compensation package to any given person is a complex task that requires balancing that employee’s experience and performance against the salary levels of comparable jobs in the wider market, internal company politics, tight budget constraints, and even the whims of corporate leaders.
This constant state of flux means an employee’s salary does not (and should not) remain stagnant over the course of their career. Along with annual compensation planning and reviews, you’ll also be responsible for calculating pay adjustments that follow performance reviews and job title changes. You’ll also need to answer questions about those pay changes when employees start to wonder what’s going on.
That’s why it’s so important for HR professionals to thoroughly understand the differences between a merit increase vs. a promotion. Knowing the details of both will help you more easily calculate the employee’s new pay level once a merit increase or a promotion is awarded and feel better prepared if you come up against difficult questions from employees.
Merit Increase Vs. Promotion: What’s the distinction?
What’s a merit raise (also known as a merit increase)?
When an employee is hired, they are often offered a salary based on the HR department’s best estimate as to their skills, experience, and overall contribution to the organization.
There is typically an understanding that if an employee performs well, continues to receive training and education, and brings value to the company, they can expect a bump in pay as a reward.
Pay increases that result from an individual’s contributions and value to the company are called merit increases or merit raises. Some companies also give merit raises to entire departments or other large groups for exceptional performance.
Offering merit increases can help organizations make sure they’re continuously rewarding employees for their good work. This in turn makes employees feel valued, validated, and aligned with the organization’s goals. Merit increases improve employee morale, motivation, engagement, and retention. In fact, a company is more likely to attract top talent if they make it clear that great performance will be rewarded. So, indirectly, offering merit increases helps keep companies competitive.
Is a merit increase the same as a raise?
They can be, but that’s not always the case.
Part of the confusion stems from the fact that different companies use the terms “merit increase” and “raise” interchangeably. Most employees will understand exactly what you mean if you inform them they’re getting a raise. They may not quite have the same understanding if you tell them they’ll be receiving a merit increase, though at the end of the day it amounts to the same thing: a boost in pay.
Worse, an employee is even less likely to understand why their coworker is getting a substantial merit increase when they themselves are only receiving a standard cost-of-living bump.
Additionally, sometimes circumstances call for a merit adjustment rather than a straight increase. This can be a salary change in a positive or negative direction. If an employee goes through an extended period of poor performance, the company might decide to dock pay rather than fire the person outright. Clearly, you would not refer to this change as a “raise.” It would simply be a merit adjustment in a negative direction.
Plus, some raises have nothing to do with merit. Many people expect pay increases every year to keep up with external factors such as the cost of living in their area, inflation, and the financial success of the company.
If a company is thriving, bringing in plenty of revenue, and the surrounding area experiences lots of growth—leading to cost-of-living increases for the people who live and work there—it’s reasonable for employees to expect an annual salary bump to offset those costs and as a reward for helping the company grow. These pay increases have little to do with any individual person’s contribution, and instead are based on the company as a whole and the broader economy.
For sake of clarity, we’ll distinguish a merit- or performance-based change from a change in pay for other reasons. Beyond that distinction, you can choose your favorite phrase among “merit increase” vs. “performance increase” vs. “merit raise” or similar terms.
What is a promotion?
Rather than a change in pay alone, as with a merit increase, a promotion involves a change in position, job title, job scope, and sometimes even a transition to a leadership role in charge of overseeing other workers.
Promotions do often come with an increase in pay, but this isn’t always the case. Sometimes employees who aren’t interested in leadership positions will accept a lateral move as a “promotion” if it opens the door for them to broaden their experience, learn new skills, and change up their daily routines.
Your company may offer promotions based on merit. For example, if a new hire goes above and beyond consistently, putting in great effort day after day, he or she may quickly rise through the ranks.
However, promotions don’t have to be based on merit.
Sometimes a company will hire someone in a basic position with the understanding that there’s an expectation for advancement in about three years, or when new jobs open up down the line. There may not always be a clear way to simply work hard and climb the ladder, but preference for promotions is often given to internal employees rather than external applicants.
It’s important to note that if an employee happens to land a promotion at the same time as the annual merit cycle, he or she should receive separate pay adjustments to reflect both the promotion and the merit increase.
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.
