While merit cycles have always been a tool for retention, Sequoia’s 2025 Compensation and Equity Report reveals that merit cycles are playing an even bigger role in keeping employees engaged and motivated.
After a year of layoffs and stiff competition for specialized artificial intelligence talent, companies aren’t just bumping up salaries or distributing one-time bonuses, they’re using their merit cycle and overall compensation strategy to reinforce stability and reward key contributors.
Here’s what we learned from our latest report.
AI Leads the Way in Salary Increases
There were notable differences in the total salary increases between industries and the size of increases by job level.
AI companies delivered the largest salary increases in 2024, with employees at all levels receiving a median increase of 5% or more. Individual contributors at the professional level received the highest increases at 5.4%.
These findings aren’t surprising given that AI companies received the largest funding deals last year. And the continued high demand for AI expertise has led to more aggressive compensation packages across all job levels.
In contrast, in the life sciences industry, which saw lower deal volume and decreased valuations, the biggest increases went to executives and management at 4.7%.
For all other tech companies, the median salary increase was 4% (see graphic below), with professional roles seeing the biggest increases at 4.5%. Executives actually saw the lowest increase among job levels.
Overall, budgets are going toward existing staff rather than growth-oriented new hires.
Merit Increase Amounts Remain Steady Across Company Sizes
When we look at merit increases by headcount, the average increase was about 4% across the board, whether a company had fewer than 100 employees or more than 500.
This is only a slight decrease from the previous year, demonstrating a consistently stable approach to how merit increases are viewed by companies.
Off-Cycle Merit Increases: Once Uncommon, Now a Retention Essential
Once a strategy reserved for larger organizations, off-cycle merit increases are now common across companies of all sizes. Nearly half of all companies with less than 100 employees are using them.
Retention is the top driver, with 80% of companies saying that’s their main reason, compared to 50% in the previous year.
For smaller or cash-constrained companies, off-cycle merit increases have the added benefit of reducing the financial impact of paying out all increases at one time. However, these companies tend to award smaller amounts, making the impact less significant to employees than annual increases. While useful, they shouldn’t be a company’s primary strategy for retention or cash management, and reward amounts should still align with a company’s compensation philosophy.
Due to their operational demands, off-cycle merit increases work best for companies who have a performance-driven culture, a structured goal-setting and reward process, and a commitment to educating employees on how performance aligns with pay.
Planning for the Next Comp Cycle
Companies took a cautious yet optimistic approach to compensation strategy heading into an uncertain 2025. The fact that merit increases stayed competitive across all headcounts reflects the shift toward retention over recruitment.
Well-designed merit increases help companies maximize their return-in-investment by reducing turnover costs and preventing issues like wage compression.
That’s why accurate benchmarking data is more important than ever. With tighter budgets, companies must ensure their compensation strategies remain competitive, making data-informed decisions essential.
For accurate benchmarking, be sure to use high-quality data that’s sourced from companies like yours in the market you’re targeting. (Learn more about how to spot high-quality benchmark data.)
More 2025 Compensation Trends
For a year-over-year view of how companies are designing their compensation programs in 2025, download Sequoia’s 2025 Compensation and Equity Trends report.
And to see how your compensation strategy compares to similar companies, connect with a Sequoia compensation advisor who can benchmark your plan against our full 2025 Compensation and Equity Report.
