What is a Merit Increase? Meaning and Examples

Article Summary:

A merit increase is a bump in pay to reward and acknowledge an employee for their achievements. These raises are important for both workers and companies because they can improve morale, production, and employee retention.

After you’ve been in a job or career for a few years, it’s natural to expect a pay increase to reflect the hard work you’ve put in. For many companies, merit raises are a common practice as a way to reward high-performing employees for their hard work and prevent them from taking jobs elsewhere.

In this article, we’ll explain what a merit increase is, how they compare to other types of pay bumps, and how you can ask your employer for a merit pay increase.

What is a merit increase?

A merit increase is a pay raise that’s based on an employee’s work performance or achievement. These pay raises are a way of rewarding employees for their hard work while incentivizing hard work in the future.

Merit increases come about in a few different ways. In some cases, companies have an annual review for each employee, and those employees who have exceeded expectations are granted a merit pay increase. At other times, a merit increase comes as a result of an outstanding achievement or performance on a particular project. In general, however, a merit pay increase is granted in response to a negotiation from an employee rather than initiated by the company.

Merit pay increases can be based on a few different factors, including department budgets and internal metrics. Some companies may have certain metrics an employee must meet to be eligible for a merit raise. Additionally, supervisors are usually held to a certain department budget. They must choose how to allocate that budget, including deciding when — and to which employees — to dole out raises.

Why companies give merit pay increases

There are several reasons why a company might have a merit pay increase policy in place. While they’re generally designed to reward high-performing employees for their hard work, companies aren’t being entirely selfless when they hand out these raises since they generally benefit the company in the long run.

Employee retention

One of the key reasons that companies give merit raises is to increase company retention. Employee turnover has long been an issue that companies have had to contend with. It’s no longer the case that people stay at the same job their entire careers. Instead, younger generations have been more prone to move to new companies to see pay increases.

Employee turnover has never been more prevalent than during the past couple of years. Dubbed the Great Resignation, more than 40 million people left their jobs in 2021, a considerable increase from previous years. And the majority of those people cited low pay as one of the reasons for leaving.

Awarding merit increases is one of the ways that companies can combat high turnover. When you reward people for their hard work in their current job, they are less likely to leave to find a higher salary elsewhere.

Better work production and environment

Merit raises have other benefits for companies outside of employee retention. For example, it’s a way to incentivize hard work among employees. When people know they’ll be rewarded for excellent work, they may be more willing to put in the extra effort.

Not only this, but it also creates positive employee morale and culture rather than one where employees feel disrespected or taken advantage of.

Merit increase vs. cost of living adjustment

Merit pay increases and cost of living adjustments are the two most common types of pay raises, and both result in a worker (or multiple workers) getting an increase in their wages.

The key difference between a merit increase and a cost of living raise is the reason behind it. A merit raise is usually directly tied to someone’s job performance, either over a particular period of time or on a particular project. They aren’t universal — rather than the entire company getting them, they are usually handed out individually.

A cost of living adjustment, on the other hand, is an increase in pay to accompany an increase in the cost of living. Many companies offer cost of living adjustments on a set schedule, such as once per year. Rather than being handed out to individual employees, these cost of living increases are usually given out company-wide.

One thing worth noting is there’s not necessarily a relationship between the increase in the local cost of living and the increase in people’s salaries with a cost of living increase. Many companies have a set policy on increases, such as boosting everyone’s pay by 1.5% each year. But with a merit increase, there’s often a correlation between someone’s job performance and their pay increase.

Pro Tip

An employee can receive a merit increase and cost of living adjustment in the same year. Even if you’ve already gotten a pay raise for inflation, keep your mind open to a merit pay increase.

Merit increase vs. promotion

A promotion refers to a type of career advancement where someone is elevated to a higher position in their workplace. Promotions are characterized by three primary characteristics: an increase in title, a change in responsibility, and an increase in pay.

When someone is promoted, they often move into an entirely different job or move into a managerial role within their same company department. With this new title usually comes a change in responsibilities. Depending on the promotion, the chance could be minor or quite significant. Finally, a promotion usually comes with an increase in salary, since the person is moving into a higher role within the company.

Merit increases and promotions both have the benefit of a higher salary, but that’s usually where the similarities end. When someone gets a merit increase, they aren’t necessarily moving into a role or taking on more responsibility. Instead, they’re simply receiving more pay for the same job, usually because of their individual performance. A merit pay increase may come with higher expectations from a supervisor, but usually not a change in the job itself.

How to get a merit increase

If you feel you’re being underpaid for your job performance or have recently had a major win in your workplace, you might be considering asking for a merit increase. Here are some tips to help you do just that.

  1. Research salary trends. When you speak with your manager, bring data about the average salaries in your industry. Be prepared to explain how your education or qualifications mean you should be closer to or above the industry average.
  2. Make a list of your accomplishments. It’s easier to ask for a merit increase — and harder for your boss to turn one down — when you present a solid list of accomplishments and achievements you’ve had in your job. For example, maybe you landed the company a huge new client or created a new efficiency in the department.
  3. Talk about your future with the company. When you ask for a merit pay increase, explain to your manager that you want to stay with the company and see a long future there. Merit pay increases are an employee retention tool, and your boss may be more likely to say yes if they feel a raise will help keep you within the company.
  4. Time it right. When you’re asking for a merit increase, make sure to do it at the right time. Rather than asking when the company is struggling financially or your boss is in a bad mood, wait until after a great earnings report or after you’ve completed a major project for your department.
  5. Follow up. When you ask for a raise, there’s a chance your boss could say no. If that happens, it’s important to be polite and thank your manager for their time either way. However, consider following up and asking your manager what you can do to get a yes next time. Maybe the two of you could work together to set certain metrics for your next merit increase.

Pro Tip

When you make your pitch for a merit increase, focus on what you bring to the company rather than why you need the money.


What is the difference between a merit increase and a raise?

A raise refers to any type of wage increase. A merit increase is a type of raise that’s specifically the result of an employee’s performance in their job.

Is a merit increase the same as a bonus?

A merit increase is different from a bonus because, while a merit pay increase is usually a permanent increase in someone’s wages, a merit bonus is more often a one-time lump sum of money. Bonuses, while often based on merit, can also be offered company-wide based on company success during a certain period.

What is a good merit increase?

According to Indeed, the average merit increase is about 3% of your overall salary. However, different jobs and positions within a single company are likely to see different merit increases.

Can you negotiate a merit raise?

Yes, you can negotiate a merit raise at work. If you feel you deserve a merit pay increase and your boss hasn’t offered one, you can request them. Additionally, you can negotiate if you’re offered a merit pay increase and feel it should be higher.

Key Takeaways

  • A merit increase is a pay raise that’s based on someone’s individual performance.
  • Companies give merit raises as an employee retention strategy and to incentivize hard work among employees.
  • A merit increase is different from a cost of living adjustment, which is usually awarded company-wide to account for an increase in the cost of living.
  • Merit pay increases often accompany annual performance reviews, but employees can request one at a different time if they feel they deserve it.
View Article Sources
  1. Merit Pay — U.S. Department of Labor
  2. Majority of workers who quit a job in 2021 cite low pay, no opportunities for advancement, feeling disrespected — Pew Research Center
  3. How Much Money Should You Save From Your Salary to Be a Millionaire? — SuperMoney
  4. 2022 Inflation Study — SuperMoney
  5. How Much Do Veterinarians Make? — SuperMoney
  6. How Much Do Dentists Make? Average Salary by State — SuperMoney
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  8. How Much Do Mortgage Loan Officers Make? — SuperMoney
  9. Inflation Breaks a 40 Year Record — SuperMoney