A merit cycle is a key component of an organization’s compensation strategy, ensuring that employee pay reflects performance, market trends, and organizational goals. This structured process, typically conducted annually, allows companies to reward high-performing employees with salary increases, bonuses, or equity adjustments. In this blog, we’ll break down how merit cycles work, why they matter, and explore the different types of merit adjustments companies use to align compensation with both employee contributions and market data.
A merit cycle is a structured process where companies adjust employee pay based on performance reviews. It typically results in base salary increases and can sometimes impact bonuses or equity distributions.
Merit cycles ensure fair compensation, drive retention, and align employee pay with market trends and performance.
Most organizations run merit cycles annually, though mid-year cycles are sometimes used for promotions or special adjustments.
Market data, often sourced from compensation surveys or integrated systems, helps companies ensure they’re paying competitively. Real-time benchmarking software like Pequity Market Pulse enhances accuracy by using fresh data.
Not always. While merit cycles often focus on performance-based pay increases, they may also include market adjustments to ensure employees are placed correctly within their compensation bands.
Responsibility for merit cycles varies by company size. In smaller organizations, HR or compensation managers typically oversee the process, while larger firms involve finance, HR, and managers across departments.
To ensure merit cycles are effective, companies should track:
Once a merit cycle concludes, communicate changes clearly to employees. Custom, engaging reward letters can enhance employee experience.