Rewarding deserving employees with unscheduled pay raises or bonuses can go a long way in building loyalty, retaining top talent and boosting morale. But, do it without a plan and it can yield the exact opposite results.
What Is a Merit Increase?
The whole idea behind merit raises is to reward the most productive and the highest-performing workers, which in turn incentivizes others to do better. If merit raises are doled out on a whim or there isn't a clear idea of how to outperform and get the raise, employees will be left confused, angry and, ultimately, less productive.
"Doing it on the fly doesn't always have the same impact as when you have a thoughtful, well-planned program tied to certain metrics," says Laura Kerekes, chief knowledge officer at human resources consulting company Think HR. "If it's done well, it's a retention tool, it's a productivity and performance management tool."
In order for companies to determine who should get a merit raise, they first have to figure out the goals of the firm. According to HR experts, companies should come up with their strategic plan for the year, and then drill that down to departmental objectives and finally, create metrics the individual employee will have to meet to reach those goals. Once the company comes up with a plan, it has to communicate clearly to employees what they will need to do to get a merit raise or bonus. "They should have a standard policy on how merit increases are going to be," says Emily Carlson, senior VP at HR services company Randstad. "If you do for one but not for all, it will have a negative impact on retention and employee morale."
[Related: New Study: Job Seekers Expect Salary Negotiation & Transparency]
Accommodating for Flexibility
There also needs to be flexibility built into the model, especially if the company operates in a competitive industry where it's important to hold onto top talent. In that case, a merit raise may be more about keeping an employee from going to a competitor than about the performance metrics he or she met. "For us, the market tends to dictate a lot of it," says Chuck Fried, president and chief executive of technology staffing company TxMQ. "The market changes so quickly and occasionally we'll find ourselves giving out an increase a couple of times a year because the employee is getting recruited by a competitor."
In other instances, Fried says merit increases happen because the employee deserves it, or the person is underpaid compared to his or her peers and as a result, requires a pay adjustment. "It's a good idea to do what makes sense for the business," says Fried.
What is a Standard Merit Increase?
While the standard merit increase for 2018 is around three percent, companies can give more or less depending on how much they can afford and what other perks they offer employees. For instance, a company may pay a below-market rate but have exemplary benefits, great time off and other intangibles that make it a top employer to work for. Another one may offer huge bonuses and high merit raises but not provide other perks like flexible time or a free gym membership.
"How much you give can be simplistic or complicated," says Kerekes. "More sophisticated models take a look at overall merit budget for the year and which departments are key to achieve the goals. Those departments may get a few more dollars than the less key ones."
Other models look at the pay of each employee or group and engage in benchmarking based on that to determine the merit increases, she says. If there's a top performer who has already maxed out in terms of salary, a company can use a bonus as a way to reward without overpaying for the employee.
What is a Merit Increase vs. a Pay Raise?
Merit increases focus on your staff's performance towards a goal, whereas simple pay raises are just arbitrary increases based on their duration of time at the company or cost of living adjustments.
Merit raises are supposed to motivate the whole staff, but can quickly breed resentment if employees don't think it's done fairly. If the company has a plan and sticks to it, it can avoid any ugliness and resentment, which can lead to high turnover. "In order for the employer to get the most out of the merit pay program, the goals have to be clear," says Kerekes. "Employees really need to understand what it is they need to do to be considered a top performer."
There's no one right answer for the pay structure your company should adopt - as long as you do your research, make the best choice for you and roll it out thoughtfully, you'll be setting yourself up for success.