Organizations use merit pay increases to recognize and reward an employee’s performance and contribution to the company. Merit increases are a tangible way to keep employees motivated and engaged, especially in a landscape where retention and morale are always on the mind of HR professionals. However, they are often done incorrectly.
As an HR pro with eight years experience, I’ve found that employees like to see that their pay is directly linked to their performance—but unfortunately, that doesn’t always happen.
When a merit pay program is structured correctly, employees who receive merit increases are more likely to stay with their existing company than look for a new job. And on the flip side, high performers who feel as if their employer doesn’t care about their efforts—or that their effort isn’t reflected in their wage—will be tempted to leave.
So, what exactly does a well-structured merit increase program look like? Below are the most common mistakes I see and merit increase best practices that can help you avoid them.
8 Common, Costly Merit Increase Mistakes (& Best Practices To Help You Avoid Them)
1. Not Having A Merit Review Process
This is the most common mistake I see, by a landslide. Companies without a timeline for merit increases or a provable rationale behind increases are opening the door to disaster. A raise or promotion should never come as a surprise.
While specific figures or exact dates may not be defined, everyone in the organization, including employees, executives, the finance team, and HR, should be aware of the goals they are striving for. Employees should understand the criteria for earning their increase and the reasoning behind the compensation they receive, how an employee can receive a merit increase, and the rationale behind what they receive. An employee should not find out during the performance review what goals they missed or achieved—this should be discussed consistently throughout the year.
| Best Practice: Make sure you have a merit pay process in place and that it is clearly communicated throughout your organization. |
2. Not Documenting The Merit Increase Process
You cannot have a successful compensation plan without documenting the entire merit process. Managers can have differing opinions on employees; having a documented process helps to ensure managers are applying merit increases consistently.
For example, an employee once told me they were promised a raise by someone who no longer worked at the organization. The expected raise was attached to a specific goal, which the employee had recently met. Unfortunately, that statement wasn’t documented by the former manager, nor was it communicated to or planned by the finance team. As a result, there was nothing I could do in HR to fulfill that promise.
Scenarios like this are morale killers. When employees put in the required time and training but don’t get what they were promised, they lose trust in your organization.
| Best Practice: Document, document, document. All interactions and conversations regarding training, goals, rewards, etc., should be noted and revisited by managers, the HR team, and finance to ensure all players are on the same page. |
3. Not Having A Performance Evaluation Process
When there are no performance evaluations to speak of—or they are not done consistently—it negatively impacts retention. It is bad practice to try and plan merit around performance if you do not define what good performance means. No manager should think “I guess they’re doing a good job”. A good process would be to have a standard document that is used, so one manager isn’t thinking “A+” and one is grading “6/10” and one is grading “above expectations.”
| Best Practice: Make sure your business has a standard document and scale for merit increases, and you’re reviewing it consistently (not just in the week before merit increases). |
4. Not Communicating Pay Increases Directly
Managers are afraid to talk about compensation with their employees, so instead of communicating directly, they avoid having a conversation and attempt to share the news in other ways.
This poor communication strategy pits the company against the employee. When employees aren’t given the opportunity to hear what they earned and why, they (sometimes rightfully) feel like their pay wasn’t thoughtfully planned.
| Best Practice: Train your managers to have effective compensation conversations (programs like CompAware can help!). |
5. “Spreading The Peanut Butter” So Everyone Receives The Same Merit Percent Increase
When you give equal pay increases as a “merit increase,” your team doesn’t feel valued. Unless they were truly equal in performance (which rarely is the case), evenly distributed increases can lower morale. This is particularly true for high performers, who may feel dismissed for their work and not motivated to work hard again.
| Best Practice: Make sure your increases truly align with your employee’s individual performance. |
6. The Merit Increase Philosophy Doesn’t Align With Company Goals
Many companies don’t have a philosophy around compensation or merit pay. Or, if they do have one, it isn’t aligned with their company’s goals. I often see incomplete or outdated policies that continue to be used. This is a crucial mistake, because your philosophy is the building block for how and why you pay your team the way you do.
| Best Practice: Make sure you identify and document your organization’s merit increase philosophy as part of your overall compensation philosophy. |
7. The Merit Increase Policy Isn’t Compliant
It should go without saying, but merit increase policies should be equitable. Unknowingly, companies can add unfair pay practices into your pay equity, putting them at risk for legal action. For example, I have seen company policies that unfairly impact people older than age 45—these could be legally challenged by an employee in certain circumstances. Organizations must do their due diligence to ensure all policies are compliant.
| Best Practice: Conduct a regular performance evaluation audit every year. You can do this internally or hire a consultant to assist. |
8. Not Doing Any Research On Market Data
Companies sometimes implement reactive pay raises based on what they believe are market trends without conducting proper research. They establish salary ranges without understanding the true value of specific positions when granting merit increases. This might be because they don’t know how to do market research, or they simply don’t have time to participate in a survey. However, just because McDonald’s is giving employees $15 per hour doesn’t mean you should.
| Best Practice: Use market data to set salary levels for your business (and stick to them). Surveys are a great place to start—you can contact us to get help with benchmarking. |
Don’t lose your best employees over merit pay mistakes.
If you don’t have the time or the expertise to organize and manage your company’s compensation structure and merit increase program, work with a compensation consultant like MorganHR. If you need help with any aspect of compensation—from clarifying your compensation philosophy to benchmarking to manager compensation training—reach out to us at MorganHR!
Our team has helped many organizations achieve pay transparency, and we’ve seen positive culture changes as a result. We can do the same for you! Get in touch with our team today to learn more.
