What is Merit Planning? Definition, Steps, Process & More

According to a study, the average merit increase of an individual is around 10%.

It is important for the modern workforce that their organization justify this increase with objective calculation. Compensation and benefits professionals hence need to have a merit planning structure that involves key metrics to avoid any biases in the assessment of employee performance.

The key metrics involved in merit planning can be decided by doing a deep study of the industry standards and the internal compensation philosophy of your organization.

Let’s have a look at how to optimize your merit planning with the best practices in the industry that are aligned with your business goals.

What is merit planning?

Merit planning is a process that allows organizations to adjust and increase an employee’s compensation package including both base salary and non-cash incentives. This structure also has the scope for adding promotions and jumping in job levels if an employee has been performing exceptionally.

Merit planning is majorly influenced by certain factors like:

Company goals - Merit planning should assess how employee performance has contributed towards achieving company goals in the long run.
Employee compensation budget - Arbitrary merit increase planning can hurt the company’s bottom line. It is very important to set a budget that covers all aspects of your merit planning.
Pay equity policies - Pay equity is the leading trend in the HR industry and your merit plans should have measures that can eliminate the pay disparities in your compensation strategy.
Employee retention - A merit pay strategy should be created with the aim of increasing employee retention as it helps save on new hire costs for your organization.
Workplace culture - Merit increases should be planned to promote your workplace culture to improve employee morale.

Employee performance - employee productivity and efficiency should be the most important factor that drives an individual’s merit increase.

Why is merit planning important?

There are a lot of reasons why merit planning is important for your organization:

Competitive merit planning has a huge impact on employee performance. For example, if your merit planning has a structure for rewarding top job performance, it would motivate the team to perform more efficiently.
Employees with strong performance are more likely to stay in your organization if their contributions are acknowledged and rewarded in the merit cycles. 57% of employees would not even entertain a call from a recruitment professional if they feel rewarded for their efforts in their current organization.
Performance-linked merit increases help comp and benefits professionals align merit planning with the business goals. With strong key performance indicators in place, linking performance with organizational goals in performance reviews can be very effective.
Good merit planning promotes transparency and fairness in your pay practices. It builds confidence and trust in your employees and helps them reduce employee turnover.
Merit planning can improve your efficiency in utilizing compensation budgets and getting the highest value of the financial resources available.
It also helps you stay compliant with labor laws to avoid any legal consequences.

How to calculate merit increases

Calculating merit increase should have a set process that can be used to streamline your merit planning process:

Identify key metrics

Set up clear KPIs that dictate your compensation planning. These might differ according to your compensation philosophy and compensation maturity. The major KPIs that are currently trending in the industry are:

The individual performance of an employee and the effect it has on company goals.
Compa ratio is a major factor that influences merit increases. It is calculated by dividing an individual’s salary by the median range of the relevant pay band they lie in.
The average merit increase in functions according to the industry standards. For example, in a year marketing might showcase an average increase of 4%, while engineering has an average increase of 8%.
The future potential of an employee is being taken into account while planning merit increases in a lot of organizations.
A company’s performance is an important metric since the merit increases are directly linked to the business’s profitability.

Set up a budget

Setting up a budget for merit planning is different from crafting the whole compensation package. It requires merging the salary increase from different factors into one common average number. It makes the calculations complex and hence it is important to have a set budget for every function and more importantly for managers to run a smooth merit cycle.

Consider external and internal salary benchmarks

As per a study, 44% of organizations have to experience employee leaving because of incompetent salary structure. Internal and external benchmarks are used to plan merit increases according to market data.

Comparing your salaries against industry standards with the use of compensation surveys and internal data also ensures an equitable pay structure and fair pay practices.

Use merit calculation matrix

It is a framework that helps you combine employee performance ratings with those of the salary bands to determine merit increases for employees.

Employees are usually categorized in the performance rating group of “exceeds expectations”, “meets expectations”, or “needs improvement”. The calculations are based on the ratings employees receive. For example, these are the ratings given to an employee belonging to the respective categories:

Performance rating for employees

In this case, the individual calculations would look like:

For an employee earning $60,000 with a "Meets Expectations" rating:

Raise Amount = $60,000 × 0.03 = $1,800

New Salary = $60,000 + $1,800 = $61,800

Communicate your strategy to your employees

A Payscale survey states that around 53% of employees feel that managers at their workplace do not have adequate training for communication compensation to employees.

In a lot of scenarios, companies are making serious efforts to optimize compensation for high-performing employees, but the workforce remains unaware of the initiatives being implemented in the merit programs. Having a communication plan is very important to bring your employees on the same page and build trust and loyalty in the workplace during a merit raise cycle.

5 tips for starting a merit increase program

Here are some tips to have a friction-less merit increase program for compensation teams:

Manager training is very important to optimize merit planning. To have a fair distribution of merit budget, the managers should understand how to conduct fair assessments and should be part of training programs that help them do so.
Create a balance of financial (equity grants, performance-based rewards, annual bonuses) and non-financial rewards (work-life balance, flexible work schedules, paid time off) in your merit planning program to have a more comprehensive and wholesome structure.
Keep up with the industry standards to reflect the current pay practices in your merit planning.
Communicate your key metrics for evaluations with your employees and take feedback on what can be improved. Since merit increases have the biggest impact on your employees, they can always guide you in the right direction.

Role of CompUp in Streamlining Merit Planning

CompUp is a compensation management software driven by AI capabilities to resolve merit planning complexities and automate compensation decisions. It has several features that aid in easy navigation and automate merit calculations for better precision.

CompUp has a section that helps study your budget utilization during merit planning. It highlights areas where you were able to save costs and where there was a need for extra investment. This allows you to allocate resources in a better way in future merit cycles.
The platform helps you with a pay gap analysis to identify and eliminate internal pay disparities for equitable merit planning.
CompUp helps you visualize increment distribution based on job levels to create a better understanding of your investments.
You can also compare your merit increase data with that of your peers in the industry to stay ahead in the talent game with the help of the peer comparison feature in CompUp.