How to Create a Sustainable and Fair Merit Increase Process

Organizations across the US are facing an employee retention crisis. In 2021, over 38 million people quit their jobs in search of more flexibility, higher pay, and better benefits. Against the backdrop of the much-talked-about Great Resignation, company leaders have been forced to sit down and think long and hard about their current retention efforts.

One compelling strategy to support your retention efforts is offering merit increases. A merit increase is a pay raise given to an employee as a reward for a stellar performance at work. This retention strategy is a way to motivate and acknowledge high performers by showing them you value their contributions to team and company success.

For merit increases to drive the desired results, you need to put a comprehensive strategy in place. Here are four steps to creating a sustainable and fair merit increase process that recognizes employees’ work and helps them feel valued for those efforts.

1. Develop a Compensation Philosophy

A compensation philosophy is a detailed explanation of the reasons for your compensation strategy. This philosophy will determine how you structure your merit increases. Once you define your approach to compensation, you have the foundation to guide every decision related to it — including why, how, and when merit increases are awarded, as well as what they translate to in monetary terms.

Consider the following when developing your organization’s philosophy:

• Study the market. How much are your competitors paying their employees?
• Determine your position within the market. Do you want to pay below the market, match the market, or lead the market?
• Determine whether you’re location-dependent or location-agnostic. If you have employees scattered across different geographical locations, will you choose to pay location-based salaries? Or will you pay everyone equally, regardless of where they live?
• Determine differences in roles and departments. Will different departments be compensated equally? How will compensation vary between roles?
• Describe differences for hybrid, in-person, and remote. Will you pay hybrid, in-person, and remote employees equally, or will their work model impact compensation? This may include offering stipends for at-home office supplies or reimbursement for work travel expenses.

Whatever you decide, clearly communicate this philosophy to employees and make it accessible for reference later on. Ongoing transparency is essential to set expectations so that everyone in your company is on the same page and understands what factors influence compensation.

2. Define the Criteria Employees Have to Meet to Earn a Merit Increase

It is best to look both holistically and specifically at your employees to help define criteria for merit increases.

By viewing your company as a whole, you’ll better define what characteristics you want your employees to have. Do those characteristics align with your organization’s mission, vision, and values? Do your current employees fit these characteristics? And how can you ensure your employees meet these standards?

When you think holistically, you also consider what it means to be a top performer. According to Martin Zwilling, founder and CEO of Startup Professionals: “Top performers are not always the ones with flashy degrees, or the most knowledge and experience. They just need the proper mindset, work ethic, and focus to get more results in a rapidly changing business world.”

As you consider top-performing characteristics beyond skill level and years of experience, you’ll begin defining behaviors that you want to see across the organization. These attributes will serve as the foundation of your merit increase criteria.

It’s also helpful to look at merit increase requirements by specific roles. For help, refer to specific job descriptions, expectations, and key performance indicators necessary to be a top performer at your company. If this information isn’t available, consider making a standard for each role moving forward.

Consider the following when creating criteria for specific roles:

• What distinguishes a good marketing manager from a great one?
• What elevates a front-end developer from okay to outstanding?
• What can each role at the company do to go above and beyond in helping your organization achieve its goals?

For example, let’s say one of your company’s objectives is to achieve revenue targets and you’ve determined expectations of your account executives (AEs) closing $1M in new deals each year. AEs could be eligible for a merit increase if they not only close $250K in new deals quarterly, but also retain 90% of customers over the fiscal year. You came to this conclusion because retaining customers, on top of closing new business, contributes greatly to your company’s goals.

Once you define the criteria to earn a merit increase, it’s essential that you develop an internal process that outlines the eligibility and process for earning a merit increase. Practice transparency around these criteria: create an easily-accessible document outlining the metrics you defined for each role. This will help ensure that merit increases are rewarded in a fair, consistent, and transparent way. Encourage managers to review this regularly with team members in 1:1s to show employees that you’re also invested in their performance and growth.

3. Adopt a Universal Process for Job Performance Evaluations

After you define the requirements to earn a merit increase, you need to measure employee performance against that criteria. Performance reviews are when you look at your workforce and decide who among them has met expectations for a merit increase.

To gain a comprehensive view of each employee’s performance, conduct quarterly 360° reviews. This type of performance review combines the perspectives of managers, peers, and the individual, allowing you to assess areas where an employee is excelling that might not be immediately obvious to managers. John Behr, executive coach for Fortune 500 companies, explains that “when 360s are thoughtfully implemented, they provide valuable insights … delivering feedback to executives that’s otherwise hard to come by.”

It’s important to note that there can be bias around performance reviews, so it’s essential to calibrate your leadership team. Setting objective criteria ensures that one manager doesn’t have stricter expectations than another, all employees are evaluated equally, and merit increases are attributed fairly.

It’s also necessary to decide where you’ll store evaluations once they're conducted. Because keeping track of performance intel can be cumbersome, storing it centrally and in context with other information is essential. You can do this easily with a tool like ChartHop. Endless Excel spreadsheets housed across teams and departments hinder what could otherwise be a seamless merit increase process on a collaborative platform.

Investing in a performance management software to centralize performance data in one place makes sure the data is accessible, consistent, and reviewed in the context of other important people analytics. Look for a platform that utilizes visualization systems (org charts, maps, dashboards) to bring People data to life, meaning that you can not only view data clearly, but also take action and collaborate on plans for the future, all in the same place.

4. Track Merit Increases Through the Lens of DEI

The corporate world has made impressive strides to combat bias in the workplace, meaning DEI initiatives are now top of mind for many HR leaders. Some of the most recognizable brands in the world, including Salesforce, Asana, and Slack, have ramped up their diversity and inclusion efforts to an impressive degree. However, compensation disparities still exist. Track merit increases by different demographics, such as age and veteran status, to ensure that all employees are rewarded fairly–according to their performance– and that no unconscious biases are at play.

Although tracking merit increases through a DEI lens is crucial, these increases are only a small piece of the puzzle when it comes to employee retention. Adopting this strategy while disregarding the role of discrimination in employee turnover is an exercise in futility. Despite great efforts companies are putting toward diversity, equality, and inclusion, pay gaps remain. ChartHop research reveals that in 2020, men earned 22% more than women, and white employees earned 44% more than their Black counterparts and 24% more than their BIPOC colleagues.

It’s therefore important to analyze the merit increases your company awards to mitigate unconscious biases and ensure fairness. Use your people operations platform to look for differences in your data. If differences do exist, can they be justified based solely on the performance metrics you outlined? If you notice disparities that are not related to the metrics, the gaps need to be closed immediately, processes need to be reassessed, and next steps need to be determined as a team.

Merit Increases are Part of a Bigger Strategy to Retain Talent

Merit raises go a long way in motivating employees to stay with your company, but they’re not the be-all end-all of talent retention. The Great Resignation marked a new era in the job market, one that requires organizations across the board to value and respect employees, acknowledge their contributions, and promote a sustainable work-life balance.

As work models shift and employees look for benefits beyond good salaries, developing a data-based compensation strategy is essential to reduce employee turnover and retain a talented, motivated workforce.

While merit pay is only a piece of the bigger picture, if employed correctly, it represents a valuable tactic to retain talent.

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