What Is a Merit Increase? How Merit Raises Work
Published by SalaryGuide, with recruiter insight from our sister company, Search for Hire.
A merit increase is an increase to base salary awarded primarily because of an employee’s performance within their current role or level.
That makes it different from:
- a promotion increase for moving into a higher-level job;
- a market adjustment intended to correct pay against the external market;
- a cost-of-living adjustment;
- a one-off bonus.
The terminology matters because two pay increases can be the same percentage but be awarded for completely different reasons.
What is a merit increase?
A merit increase links a change in base salary primarily to performance.
An employer might consider factors such as:
- performance against agreed objectives;
- quality or consistency of contribution;
- overall performance rating;
- salary position within an internal pay range;
- available merit budget;
- manager recommendation;
- internal calibration;
- company compensation policy.
Not every employer uses all of these.
Some organizations have formal performance ratings and merit matrices.
Others use a simpler management and compensation-review process.
The useful distinction is:
individual performance influences the salary adjustment, while the employer’s compensation framework influences how that performance translates into pay.
How does a merit increase work?
A typical process might look something like:
Performance assessed
→ Employer establishes available compensation budget
→ Employee’s salary position and performance are considered
→ Manager / compensation process determines an increase
→ Base salary is updated
The exact process varies by employer.
For example, one company may make merit decisions during an annual performance cycle.
Another may have a different review timetable or combine merit with a wider compensation review.
Receiving strong performance feedback also does not automatically guarantee a particular percentage.
The final increase may depend on both the performance assessment and the employer’s pay structure.
Merit increase vs raise: what’s the difference?
“Raise” is a broad term.
A merit increase is one type of raise.
A general raise may happen for several reasons, including:
- strong or sustained performance;
- market misalignment;
- expanded responsibilities;
- role evolution;
- internal compensation review;
- another employer-specific reason.
A merit increase is narrower:
The primary reason for the adjustment is the employee’s performance within their current role.
Example
Suppose your job and level have not materially changed, but you performed strongly during the year and your employer increases your salary as part of its merit-review process.
That is likely a merit increase.
Now suppose your role has expanded significantly and your salary no longer reflects the work you are doing.
That may require a broader raise conversation rather than treating the entire issue as a merit award.
SalaryGuide’s How to Ask for a Raise covers that wider situation.
Merit increase vs promotion increase
A merit increase normally relates to performance within the current role or level.
A promotion means moving into a higher-level role.
That distinction matters because promotion compensation should be assessed against the role you are moving into, not simply as a reward for performing well in the old one.
| Merit increase | Promotion increase |
|---|---|
| Usually same role/level | Higher-level role |
| Primarily performance-linked | Primarily linked to new role/level |
| Compensation changes within existing role context | Compensation should reflect promoted role |
| Does not itself imply new responsibilities | Normally accompanies greater scope or responsibility |
If you have been offered a promotion and want to evaluate the compensation attached to it, see Promotion Salary Increase: What’s a Good Percentage?.
If you are still trying to secure the promotion itself, use How to Get Promoted.
Merit increase vs bonus
A merit increase and a bonus reward different things financially.
Merit increase
Typically increases base salary.
For example:
Current base salary: $50,000
New base salary after merit increase: $52,000
The employee’s ongoing base salary is now $52,000.
Bonus
A bonus is generally a separate variable or one-off payment.
For example:
Base salary: $50,000
Bonus payment: $2,000
The bonus does not, by itself, mean the base salary has changed to $52,000.
The details of bonus schemes vary considerably, so check the employer’s actual compensation plan rather than assuming every scheme works the same way.
Merit increase vs cost-of-living adjustment
The distinction is primarily about why the pay is changing.
Merit increase
Linked primarily to individual performance.
Cost-of-living adjustment
Linked to an employer’s cost-of-living or inflation-related compensation policy where one exists.
Not every employer provides cost-of-living adjustments.
And a cost-of-living adjustment is not automatically a judgment about an individual’s performance.
An employee could theoretically receive:
- a merit increase;
- a cost-of-living adjustment;
- both;
- neither;
depending on the employer’s compensation system.
Merit increase vs market adjustment
A market adjustment has another purpose.
It seeks to address the relationship between the employee’s salary and the external market for comparable work.
For example, an employer may discover that compensation for a particular role has fallen materially behind current market levels.
Correcting that gap is conceptually different from awarding an increase because one employee performed especially well.
That distinction matters because:
strong performance does not prove that salary is market-aligned
and:
market misalignment does not automatically mean performance has been exceptional.
For deeper guidance on comparing compensation with relevant external roles, see Salary Benchmarking or explore SalaryGuide’s marketing salary data.
Merit increase vs other pay changes
| Pay change | Main reason | Same role/level? | Base salary usually changes? |
|---|---|---|---|
| Merit increase | Individual performance | Usually yes | Typically |
| General raise | Performance, market alignment, expanded scope or another compensation reason | Often | Usually |
| Promotion increase | Movement into higher-level role | No | Usually |
| Market adjustment | External salary-market alignment | Usually | Usually |
| Bonus | Variable or one-off reward | Usually | No |
| COLA | Cost-of-living/inflation policy | Usually | Usually |
These are useful general distinctions.
An individual employer may use different terminology or combine several compensation changes into one review.
If you are unsure, ask what the employer means by the label being used.
How to calculate a merit increase
If you already know the percentage, calculate the new salary using:
New salary = Current salary × (1 + Merit increase %)
Remember to convert the percentage into decimal form.
For example, a 4% increase is 0.04.
Illustrative example
Current salary:
$50,000
Illustrative merit increase:
4%
Calculation:
$50,000 × 1.04 = $52,000
New salary:
$52,000
Salary increase:
$2,000
The 4% figure is an arithmetic example only.
It is not SalaryGuide data and it is not SalaryGuide’s recommended merit increase.
How to calculate the percentage from two salaries
If you know your old and new salaries:
Merit increase % = ((New salary − Current salary) ÷ Current salary) × 100
Using the same example:
(($52,000 − $50,000) ÷ $50,000) × 100 = 4%
What is a good merit increase?
There is no universal percentage that makes a merit increase good or bad.
The percentage needs context.
Ask:
- What is the resulting salary?
- How did the employer assess my performance?
- Where does my salary sit within the relevant internal range, if known?
- How does my salary compare with the external market?
- Has my role remained at the same level?
- Have my responsibilities materially expanded?
- Was my salary already misaligned before the increase?
- Is another compensation issue being confused with the merit increase?
For example, a seemingly strong percentage could still leave an employee materially below market.
A smaller percentage could still produce reasonable compensation where the employee was already positioned appropriately and remains in the same role.
That does not make the percentage irrelevant.
It simply means the percentage is only one part of the assessment.
Why can two employees receive different merit increases?
Because a merit process may consider more than one factor.
Possible differences include:
Performance
Employees may have different performance outcomes or ratings.
Salary position
Two people performing similar work may already sit at different points within an employer’s salary structure.
Compensation budget
The employer may have a finite budget for merit increases.
Role or pay structure
Different roles, levels or salary bands may be handled differently.
Calibration or management review
Some organizations review proposed increases across teams before finalizing them.
The exact process depends on the employer.
Do not assume somebody else’s percentage automatically proves what yours should have been.
Instead, understand the reasoning behind your own result.
What if your merit increase feels too small?
First identify what the underlying problem actually is.
Was the issue your performance assessment?
Ask how your performance was evaluated and what specifically affected the outcome.
Was the employer working within a fixed merit budget?
Ask whether the percentage reflects a wider budget constraint.
Are you already positioned relatively high within the internal salary range?
If your employer uses formal bands, ask where your salary sits.
Is your salary below market?
That is not purely a merit issue.
You may need to discuss broader compensation alignment.
SalaryGuide’s How to Ask for a Raise is the better resource for that conversation.
Have your responsibilities materially changed?
If the role itself has expanded, the correct question may be whether compensation still reflects the job you are actually performing.
Again, that can become a broader raise discussion.
Are you effectively operating at a higher level?
If you are now doing materially higher-level work, the problem may be promotion or leveling rather than merit pay.
Use How to Get Promoted to assess that progression question.
What should you ask your manager or HR?
You do not need to challenge the number immediately.
Start by understanding how it was determined.
Useful questions include:
“Can you help me understand how my merit increase was calculated?”
“How did my performance assessment affect the increase?”
“Does the company use a salary range for my role, and where does my salary currently sit within it?”
“Is this adjustment purely merit-based, or does it include any market adjustment?”
“If I wanted to improve my performance outcome in the next cycle, what specifically would I need to demonstrate?”
“If my responsibilities have expanded beyond the current role, should we discuss that separately from the merit review?”
These questions help distinguish:
- performance;
- internal compensation structure;
- external market alignment;
- expanded role scope;
- promotion.
That distinction is more useful than arguing about the percentage before you know what it represents.
Merit increase quick checklist
If you have just been told you are receiving a merit increase, confirm:
What is it?
- Is the increase specifically linked to performance?
- Does it increase base salary?
- When does the new salary take effect?
How was it determined?
- What performance assessment was used?
- Does the employer use a merit budget?
- Does salary-band position affect the decision?
- Is any market adjustment included separately?
What does it mean for your compensation?
- What is your new salary?
- How does that compare with relevant market pay?
- Does your current role and level still accurately reflect your responsibilities?
Is this actually a different compensation issue?
- If your pay is below market, do you need a broader raise conversation?
- If the role has moved to a higher level, is this really a promotion question?
- If the payment is one-off, is it actually a bonus rather than a base-pay increase?
A merit increase is easiest to understand when you separate why the money was awarded from whether your overall compensation is appropriate.
Merit pay primarily reflects performance within your current role.
Market adjustments, broader raises and promotion increases solve different compensation problems.
