What is a Merit Increase?

Definition: A merit increase is a raise given to an employee on the basis of satisfactory performance. It is a way to reward a worker for delivering above-average results.

What Does Merit Increase Mean?

Merit increases are part of compensation structures designed by organizations to reward their best employees. They are more frequently approved after an objective performance assessment is implemented to evaluate all employee’s productivity and attitude within the workplace. The purpose of the merit increase is to reward over-achievers and to motivate those with lower productivity ratios or bad attitude to step up to the challenge of enhancing their skills and ability to relate with others.

This compensation tool has its disadvantages, since it is impossible to objectively obtain a performance measure of every single worker. Boss-employee conflicts or prejudices, badly designed performance assessment tools or even unclear policies that don’t communicate well enough what the company actually values can create a negative perspective towards merit increases. Nevertheless, they constitute a powerful tool to reward high performers and to motivate the company’s workers to get better every day.


Eco Light Bulbs Co. is a company that manufactures environment-friendly light bulbs for domestic and industrial uses. The company is currently performing a staff review to determine merit increases. They hired a consulting company to measure the performance of a team of 100 employees and agreed to the following criteria: staff with 4.5+ performance score will get a 10% raise; those in a range of 4 to 4.4 will get 7% raise; those in a range of 3.5 to 3.9 will get a 5% raise and those in a range of 3 to 3.4 will get a 2% raise.

After the performance reviews were implemented, 70% of the staff ended up in the 3 to 3.4 range. This caused concerns among the company’s executives since most of the staff members are considered “average” employees. The Board of Directors decided to review the matter more carefully to develop strategies to increase the company’s productivity. Nevertheless, each employee was rewarded according to the pre-established merit increases.