What Is a Merit Increase?

A merit increase raises an employee’s ongoing base pay because of their performance, so it can affect regular earnings well beyond the pay period when it begins. Employers usually decide whether to offer increases and how much to award through a review process tied to goals, expectations, or specific contributions. Unlike a bonus, a merit increase generally changes the pay rate used for future regular earnings. It is not the same as a cost-of-living adjustment, a promotion increase, or a market adjustment, each of which addresses a different reason for changing pay. The criteria, timing, and amount depend on the employer’s program and may also be shaped by agreements, workplace policies, and applicable requirements. Employees can better understand a decision by asking which performance measures informed it and what expectations will guide future reviews.

How Merit Increases Work

Merit pay, also called pay-for-performance, links a pay increase to criteria established by the employer. It commonly involves a review meeting where the employer and employee discuss performance over a set period. The U.S. Department of Labor describes this general approach, while employers set the criteria and process for their own merit programs.

Many employers consider merit increases during an annual review cycle, but an increase may also follow a major accomplishment or sustained contribution. Timing alone does not determine whether a raise is merit-based. What matters is whether the pay decision is connected to demonstrated performance. For example, an employee who consistently meets deadlines and improves a work process may receive a larger increase than a peer whose performance meets baseline expectations. The example illustrates how an employer might distinguish levels of contribution, though the actual criteria depend on its program.

A merit increase typically raises base pay on an ongoing basis rather than providing a one-time payment. As a result, future percentage-based increases may be calculated from the higher base. For employees eligible for overtime, the applicable pay rate can also affect overtime calculations. A bonus is generally a separate payment and does not by itself change the employee’s ongoing base rate.

How a Merit Increase Differs from Other Pay Changes

“Raise” is a broad term. Employers may change pay to recognize individual performance, respond to market conditions, or reflect a change in an employee’s role. The reason for the change helps distinguish a merit increase from other pay adjustments.

Merit Increase

A merit increase is based on individual performance. The employer evaluates the employee against stated or understood criteria and adjusts base pay accordingly.

Cost-Of-Living Adjustment

A cost-of-living adjustment is intended to help pay keep pace with rising expenses or economic conditions. It is not primarily a reward for one person’s performance. Eligible employees may receive the same percentage or dollar adjustment.

Promotion Increase

A promotion increase reflects a move to a role with greater responsibility, a different job level, or a new pay range. Strong performance may help an employee earn a promotion, but the pay change is tied to the new position.

Market Adjustment

A market adjustment is intended to keep pay competitive for a role, skill set, or location when existing pay is out of step with hiring conditions or comparable jobs.

Bonus or Incentive Payment

A bonus or incentive is typically a one-time payment that may reward individual, team, or company performance. It does not necessarily change base pay, which is the key difference from a merit increase. Employers may use more than one approach at once. For instance, an employee could receive a general pay adjustment as well as a separate merit increase.

How Employers Determine Merit Increases

A sound merit-pay process begins before the pay discussion. Employees need a reasonable understanding of what successful performance looks like, and managers need a consistent way to evaluate it. Common considerations include progress toward individual or team goals, work quality and timeliness, relevant feedback, growth in job knowledge, collaboration, reliability, and contributions to efficiency or problem-solving.

The right measures depend on the role. Sales performance may be assessed against specific revenue targets, while operations or creative work may require a broader evaluation of judgment, service, and execution. Different measures make sense for different jobs, but the process should still be consistent. Managers should be able to explain why employees in similar roles with comparable performance received similar or different outcomes.

What Makes a Merit Increase Process Fair?

Merit increases can motivate employees when they appear connected to real contributions. They can undermine trust when decisions seem mysterious or depend on who advocates most forcefully. A clear process helps employees understand expectations and gives managers a sound basis for decisions.

Set Expectations Early

Discuss goals and performance standards at the start of the review period. Introducing them only when pay decisions are announced can leave employees unsure how their performance was assessed.

Give Feedback Throughout the Year

Regular check-ins give employees a chance to improve and help managers build a fuller picture of performance. An annual review should not be the first time an employee hears about a concern that affects a pay decision.

Use Evidence and Compare Decisions

Managers should support evaluations with examples, completed work, and relevant feedback rather than relying only on general impressions. Because managers may interpret standards differently, leadership can compare evaluations across teams before increases are finalized.

Explain the Decision

Employees may not always receive the increase they hoped for. A respectful explanation of the assessment and its reasoning can help preserve trust. Specific expectations and next steps for growth make that explanation more useful.

What Employees Can Ask About a Merit Increase

If you are told you will receive a merit increase, it is reasonable to ask how the decision was reached. The goal is to understand the connection between performance and pay, not to challenge every detail. You might ask which accomplishments or measures informed the decision, what period was reviewed, and how the increase relates to your performance rating or goals. It can also help to clarify when the new rate takes effect and whether a change in your role or scope should be discussed separately.

If you do not receive an increase, ask for specific feedback and a forward-looking plan. Clarify the expectations, what support is available, and when progress will be reviewed again. These questions can help make the next review period more concrete.

Are Merit Increases Required by Law?

At the federal level, the Fair Labor Standards Act does not require or address merit pay, according to the U.S. Department of Labor. The department describes merit pay as a matter between an employer and employee or the employee’s representative.

Employment agreements, collective bargaining arrangements, internal policies, and applicable state or local requirements may also affect pay decisions. The absence of a federal requirement to provide merit pay does not remove the need to follow rules and commitments that apply to a particular workplace.

*This article is for general informational purposes only and is not legal advice.