Merit Increases – 4 Things to Consider

We are now a few weeks into 2013 and hopefully you’ve spend some time planning and developing business goals for the new year!  Planning is one of the most important things a small business owner can do to ensure they achieve desired business results.

A portion of the planning process is creating an annual operating budget which projects revenues and determines how dollars will be spent.  This is also the time when organizations determine merit increase percentages for the coming year.

Every organization is different in the way they determine and allocate raises and there are many different models and approaches to employee compensation.  I’m a proponent of using a structure performance management process to develop employees, hold them accountable for desired results and reward them for meeting objectives by awarding merit increases.

Organizations that manage employee performance often achieve better results because employees who perform at desired levels support overall strategy.

Merit Increases – 4 Things to Consider

1. Create a Structure

It is important to create a structure to budget for pay increases, develop measurable goals, and manage employee performance. The process begins by writing employee goals and communicating performance expectations to employees.  It is followed by a process of monitoring performance and concludes with a performance evaluation at the end of the rating period.  The length of the rating period (6 mo, 12 mo, 18 mo) is not as important as the consistency in its structure.  Many organizations award merit increases annually but if a decision is made to give raises every 18 months or 24 months that is ok, as long as employees understand company policy.

2. Budgeting

Merit increases should be included in an annual budget and based on national benchmark and COLA comparison data. This ensures that salary increases are competitive. It is important to be competitive with pay increases but unwise to unnecessarily overcompensate – something you won’t know unless you compare your pay structure with what others are doing. A simple way to check comparisons is to use sites like or professional organizations provide salary comparison data by industry and employee position.  It is worth investing in this type of data to make sure your pay practices are fair and competitive.

3. Communication

Effective communication is critical to healthy work environments and organizations should proactively share any information that involves employee pay.  The grapevine is a powerful engine and what leadership does not communicate, employees will ad-lib through gossip. The goal is to share information and answer questions before employees think of asking them.  For example, if revenues are down and a business decision is made to freeze salaries, employees should be made aware of the decision, why it was made and included in discussions to help improve the bottom line.

4. Show Employee Appreciation

The past several years has forced many organizations to freeze salaries and be creative with recognizing and rewarding employees.  Find a team of employees to help brainstorm budget friendly ways to  show appreciation.  Things like preferred parking , bonus days off, onsite child care, and continuing education opportunities are just a few things you can do to show your employees that your  appreciation – even through difficult times.   The  key is to help employees feel appreciated for their hard work!

Every organization should determine the appropriate timing of merit increases but if you begin by developing systems and process to budget resources, manage performance and allocate raises based on performance, you will be well on your way to creating a culture that achieves objectives and feels appreciated for doing so!

If you are interested in learning more about managing employee performance, check out our new on-line Employee Performance Management class.  The class is $97 and is an inexpensive way to train you or your managers and we offer a money back guarantee so you have nothing to lose.  Use coupon code smart20 to get 20% off.  Click here to learn more!  

photo by:  Images of Money


  1. […] performers should receive higher than average pay increases.  This is done by having a structured performance management process that incorporates performance […]

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