A merit increase is a raise in base pay given to reward an employee's performance, usually during an annual compensation review. Its size typically depends on the employee's performance rating and where their pay sits in the salary range.
Key takeaways
- Merit increases are permanent changes to base salary, unlike one-time bonuses.
- US salary increase budgets averaged 3.7% in 2025 and were projected at 3.6% for 2026.
- A merit matrix links performance ratings and position in range to a recommended raise.
- Merit is different from a cost-of-living adjustment, which isn't tied to performance.
How merit increase works
Finance sets a total merit budget, often expressed as a percentage of payroll. Compensation teams build a merit matrix that recommends higher increases for stronger performers and for employees lower in their pay range, using compa-ratio to measure position. Managers then propose raises within guidelines, HR reviews for consistency and pay equity, and approved raises take effect on a set date.
WorldatWork's survey of 4,250 total rewards and HR leaders found US salary increase budgets averaged 3.7% in 2025, down from the 3.8% projected, and were projected at 3.6% for 2026 (WorldatWork 2025-2026 Salary Budget Survey). Those totals include merit plus other increases such as promotions and adjustments.
Merit increase example
A simplified merit matrix with a 3.5% budget:
| Rating | Below midpoint (compa-ratio under 0.95) | Near midpoint (0.95 to 1.05) | Above midpoint (over 1.05) |
|---|---|---|---|
| Exceeds | 6.0% | 5.0% | 4.0% |
| Meets | 4.0% | 3.0% | 2.0% |
| Below | 0% | 0% | 0% |
An employee who exceeds expectations and sits below midpoint gets 6%, moving them toward market. One at the top of the range who meets expectations gets 2%. Use the salary increase calculator to model raises.
Why merit increase matters for employers
Merit increases are how most employees experience pay progression, and they're a strong signal of how performance is valued. When budgets are tight, small differences between top and average performers can make high performers feel undervalued, which feeds turnover.
They also shape pay equity. Raises applied as a percentage of current pay can widen existing gaps over time. Review proposals by demographic group and by manager before approval. Compensation software automates matrices, budgets, and manager worksheets, and our merit cycle kickoff email helps launch the process.
Common merit increase mistakes to avoid
Peanut-butter raises
Giving everyone the same percentage weakens the link to performance.
Ignoring range position
Without compa-ratio guidance, high-paid employees get the biggest dollar raises.
Skipping equity review
Check proposals for gaps by gender, race, and manager.
Poor communication
Explain the budget and how decisions were made.
Merit increase: questions people also ask
What is the average merit increase for 2026?
What is the difference between a merit increase and a bonus?
What is a merit matrix?
Is a merit increase the same as a cost-of-living adjustment?
When are merit increases given?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>A merit increase is a raise in base pay given to reward an employee's performance, usually during an annual compensation review. Its size typically depends on the employee's performance rating and where their pay sits in the salary range.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/merit-increase/">HRTally HR Glossary, Merit increase</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.