Merit Increase

What is a Merit Increase?

A merit increase is a permanent raise to an employee's base salary awarded specifically for individual performance, rather than tenure, inflation, or a company-wide adjustment. Forbes draws a clear line between the two: a pay raise isn't always tied to performance, while a merit increase specifically recognizes exceptional work.

How is a Merit Increase Different From a Cost-of-Living Adjustment?

A cost-of-living adjustment (COLA) applies broadly across the workforce to keep pace with inflation, regardless of individual performance. A merit increase is selective by design. Indeed notes that some employers distribute merit increases annually, often scaling the percentage so top performers receive the highest raises relative to average performers.

How Much is a Typical Merit Increase?

Merit budgets fluctuate with the broader labor market, but tend to move within a narrow band year to year.

SHRM has reported that average merit increase budgets for 2026 are expected to hold roughly steady with 2025, as employers balance retention pressure against tighter budgets. Within that overall pool, individual awards vary widely: a top performer might receive several times the increase given to an average one, since the whole point of a merit pool is differentiation rather than an even split.

How is a Merit Increase Different From a Bonus?

The distinction comes down to permanence. A merit increase permanently raises base salary and compounds into future raises, retirement contribution calculations, and total compensation going forward. A bonus, by contrast, is a one-time payment that doesn't change the underlying salary base at all.

This is also what separates a merit increase from broader variable pay like commissions or profit sharing, which fluctuate every period rather than locking in a permanent change to fixed pay.

Why Do Merit Increases Matter for Retention?

A well-run merit process signals to top performers that their contributions are recognized in a lasting way, not just a one-time thank-you. Employees who don't see performance reflected in their salary pay trajectory over time are more likely to look elsewhere, contributing to turnover among exactly the people an organization can least afford to lose.

Merit increases also connect naturally to career progression. Employees advancing through a career pyramid typically see merit increases stack alongside promotional adjustments, reinforcing that both sustained performance and advancement get rewarded distinctly.

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Frequently Asked Questions

Q: Is a merit increase the same as a raise?

A: Not exactly. All merit increases are raises, but not all raises are merit-based; some raises come from cost-of-living adjustments, tenure, or market corrections unrelated to individual performance.

Q: What is a typical merit increase percentage?

A: Recent employer surveys put average merit increase budgets around 3.2% to 3.5%, though individual awards vary based on performance rating.

Q: Does a merit increase count toward future raises?

A: Yes. A merit increase permanently raises base salary, so it becomes the new starting point for calculating future percentage-based raises.

Q: Can an employee get both a merit increase and a bonus in the same year?

A: Yes. Many employers award both: a permanent merit increase to base salary alongside a separate, one-time performance bonus.

Q: Are merit increases guaranteed every year?

A: No. Merit increases depend on individual performance ratings and the employer's compensation budget for that cycle, which can vary or even pause during difficult financial periods.