Merit Increase

Merit Increase Guide: What HR Won’t Tell You (2025 Update)

Merit increase budgets are projected to average just 3.3% in 2024, despite top performers potentially receiving up to 10% salary adjustments. While companies continually promote these increases as recognition for your hard work, there’s much more happening behind the scenes than what appears on your compensation statement.

What is a merit increase exactly? Unlike a standard raise, a merit salary increase is a permanent adjustment to your compensation based specifically on performance. We’ve found that understanding the annual merit increase process can significantly impact your earning potential. For example, even a modest 3% merit increase on a $60,000 salary compounds to over $69,500 within five years. However, the merit increase vs raise distinction often confuses employees, leading to missed opportunities for effective negotiation.

In this comprehensive guide, we’ll uncover what HR departments typically don’t share about merit increases, including the hidden criteria that influence decisions, how different industries approach compensation, and actionable strategies to position yourself for maximum salary growth in 2025 and beyond.

What is a merit increase and how is it different from a raise?

Merit increase meaning explained

A merit increase represents a salary adjustment based exclusively on your performance and contributions to company goals. Unlike other types of compensation changes, merit increases directly reward your achievements, productivity, and value to the organization. These performance-based adjustments can be awarded annually following performance reviews or after successfully completing significant projects.

The average merit increase typically hovers around 3% of your current salary. Nevertheless, this percentage varies significantly—from as little as 1% for lower performers to as much as 10% for top-tier professionals demonstrating exceptional value. Furthermore, merit increases serve multiple strategic purposes beyond simply rewarding good work:

• They recognize and validate exceptional performance
• They boost productivity and workplace morale
• They create competitive advantages in talent retention
• They encourage continuous skill development and improvement

Merit increase vs raise: key differences

Though often used interchangeably, merit increases and standard raises differ fundamentally in their purpose and implementation. The primary distinction lies in what triggers the adjustment:

Merit increases incentivize employees to contribute maximally toward company objectives and meet key performance indicators. In contrast, standard raises—particularly annual raises—encourage retention by rewarding employees simply for staying with the company over time.

Additionally, standard raises frequently account for external factors rather than individual performance. Cost-of-living adjustments (COLAs), for instance, help maintain purchasing power amid inflation and rising living expenses. These adjustments generally apply across the board, regardless of performance metrics.

Merit increase vs bonus and promotion

Bonuses (also called incentive pay) differ from merit increases in permanence and purpose. While merit increases permanently adjust your base salary, bonuses represent one-time payments typically tied to specific achievements.

Promotions, meanwhile, almost always involve changes in roles or responsibilities. Although promotions typically include salary increases, they primarily recognize readiness for greater responsibility rather than just excellence in your current position.

Equity adjustments represent yet another distinct form of salary adjustment. These modifications address compensation imbalances when an employee’s salary falls below market value or appears inequitable compared to colleagues with similar credentials and responsibilities.

Why companies use merit increases strategically

Boosting retention and morale

Companies implementing formal merit increase programs experience 31% less voluntary turnover compared to those without such programs.

When employees receive recognition tied to performance, they develop stronger emotional connections to their workplace.

Merit increases particularly help retain high-performing employees who might otherwise be recruited away.

Aligning performance with business goals

Merit increases create direct connections between individual effort and organizational objectives. By tying compensation to specific performance metrics, companies ensure employees focus on areas critical to business success.

Creating a culture of recognition

Organizations with strong recognition cultures are 12 times more likely to achieve strong business outcomes.

Merit increases ultimately work best when integrated into comprehensive strategies that include development opportunities, work flexibility, and other non-financial benefits.

How HR calculates and decides merit salary increases

Performance review systems

Effective performance evaluations use multiple data sources:

• Key Performance Indicators (KPIs)
• Peer feedback and 360-degree reviews
• Goal completion rates
• Customer satisfaction scores

Merit matrix and compa-ratio

The cornerstone of merit increase calculations is the merit matrix—a mathematical grid that guides consistent administration of salary adjustments.

Compa-ratio = Current Salary ÷ Salary Range Midpoint

Budget constraints and industry benchmarks

Organizations allocate approximately 3-5% of annual salaries for merit-based raises.

Annual merit increase trends for 2025

Companies plan to promote 9–10% of their workforce in 2025, with an average promotion increase of 9.3%.

What HR won’t tell you about merit increases

Hidden criteria behind the decisions

HR departments frequently consider undisclosed factors like:

• Flight risk assessment
• Proximity to salary cap
• Future role planning
• Internal equity concerns

Bias and subjectivity in performance reviews

Even the most structured performance review systems contain inherent biases.

Why some roles are favored over others

Revenue-generating roles typically secure 20-30% larger merit increases than support functions.

How internal politics can influence outcomes

Managers with stronger relationships to senior leadership secure approximately 15% larger merit budgets for their teams.

How to prepare and earn a merit increase

Track your achievements with data

Quantify your impact with specific metrics. Maintain a folder with positive feedback from managers, peers, and clients.

Align your goals with company KPIs

Identify 2–3 key performance indicators that directly connect to your role’s function and responsibilities.

Communicate your value effectively

When discussing compensation, focus on business impact rather than personal needs.

Timing your ask strategically

Schedule your compensation discussion strategically—ideally after notable project completions or performance feedback.

Conclusion

Merit increases represent far more than simple salary adjustments. Understanding how they work empowers you to navigate compensation discussions more effectively and maximize your career earnings over time.

FAQs

Q1. What is the projected average merit increase for 2025?
The average merit increase budget for 2025 is projected to be 3.3%, remaining unchanged from earlier forecasts. However, this percentage can vary by industry, with energy and high-tech sectors offering the highest projected merit budgets at 3.5%.

Q2. How does a merit increase differ from a standard raise?
A merit increase is a performance-based salary adjustment that rewards individual achievements and contributions to company goals. In contrast, a standard raise is typically time-based and acknowledges continued employment, often applying consistently across employees regardless of performance.

Q3. What factors influence merit increase decisions beyond performance metrics?
Merit increase decisions are influenced by various factors beyond performance, including an employee’s flight risk assessment, proximity to salary cap, future role planning, and internal equity concerns. Additionally, revenue-generating roles and departments facing talent shortages often receive preferential treatment in merit increase allocations.

Q4. How can I effectively prepare for and earn a merit increase?
To increase your chances of earning a merit increase, track your achievements with quantifiable data, align your goals with company KPIs, communicate your value using concrete metrics, and time your compensation discussions strategically. It’s also important to maintain a record of positive feedback and focus on projects that directly impact the company’s bottom line.

Q5. Are merit increases the same across all industries?
No, merit increases can vary significantly across industries. For 2025, projections show that healthcare services have the lowest projected merit budget at 3.0%, while energy and high-tech sectors have the highest at 3.5%. Retail and wholesale industries fall slightly below the national average at 3.2%.