Merit increases are a powerful way for companies to reward and retain their best people. Whether through a bump in base salary or a one-time bonus, they show employees their hard work is valued and motivates them to keep performing at a high level.
The key to employee satisfaction with their merit increases is proving a fair and objective process. One reason it matters: Employees who believe they’re paid fairly are 85% more engaged and 62% more committed to their organization than those who don’t.
With so much at stake, it’s no wonder that the merit cycle — the period when a company reviews performance and decides on individual awards — is one of the most time-intensive and complex processes employers take on each year. The more employees you have, the more complicated it gets.
If you’re a new or small company, your approach is probably informal. But as your company grows, so should your merit process, making a defined structure more essential as you expand your headcount.
Whether you’re just getting started or wondering if you’re on track, here are some things to consider as you build your merit award process. Plus, we’ll take a look at what other companies are doing, according to Sequoia’s 2024 Compensation Practices Report.
When Should You Have a Formal Merit Increase Process?
Typically, when companies are in their early stages, turnover is high and resources are low, so they offer equity grants or variable pay as incentives. Sequoia data shows that only 66% of companies with fewer than 100 employees have a formal merit increase process. But by the time companies reach 500 employees, a formal process is in place.
Here are some things to consider as you build your program.
Fewer than 100 employees: Although smaller companies typically have a more personalized approach and flexibility with merit increases, this is the time to start building structure. Even if you begin by just documenting your merit decisions, you’re setting yourself up to create a consistent and fair process.
100 to 499 employees: When your company hits 100 employees, start implementing guidelines for eligibility and reward amounts. This is important for keeping managers accountable and to prevent bias and inequities. At this stage, following a documented plan will have a bigger impact on your company’s budget and on employee motivation and performance.
500+ employees: If you’re operating without a formal merit plan at this stage of operational complexity, you’re vulnerable to compliance risk. By now, you should have a well-defined merit increase plan backed by market data to be sure your processes are scalable and objective.
As companies grow, so does the competition for top talent. So, it follows that as headcount increases, the waiting period for eligibility for merit increases shortens. Sequoia data shows that while 33% of smaller companies (fewer than 100 employees) open eligibility after one year of employment, only 8% of companies with 500 or more employees have a waiting period of that length.
That’s because larger companies have more structured job roles with clear performance metrics. This allows you to base increases on measurable data and criteria, making implementing merit increases easier and allowing for a shorter eligibility period.
Also, employees often relate shorter merit increase eligibility periods with faster career growth, which can be a strong incentive for high performers.
Regardless of company size, Sequoia data shows that off-cycle merit increases are consistently used to retain high-performing employees.
These increases are offered outside of the regular merit review cycle to reward key contributors and maintain their engagement. This is particularly important if you’re a smaller company who lacks the resources to counter job offers from competitors.
Off-cycle merit awards are also used to correct pay inequities, which are often created during early periods when companies lack a compensation strategy. That lack of a structure often leads to pay disparities for employees in similar roles and levels of experience. Off-cycle increases help you close these pay gaps as they’re revealed.
How Sequoia Can Help
Competitive market benchmarking can help you design a merit plan that satisfies and motives your top performers, while keeping your runway intact. Connect with an experienced Sequoia consultant to learn how we can help make the process easier and equitable.
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