A merit increase is an employee's increase in hourly wages or yearly salary based on individual performance. This is as compared to a standard company-wide yearly pay increase, or a cost of living increase. Additionally, a merit increase may go hand-in-hand with a standard increase; i.e. everyone in the company may be receiving a pay raise, but the additional percentage may vary from person to person based on job performance.
A merit increase and a merit bonus, though often used interchangeably, are not technically the same thing. A merit bonus may be offered at the end of a company's fiscal year to an employee or employees who have gone above and beyond their standard job duties, or who have had excellent performance in their jobs. This merit bonus may be a one-time flat payment, which is where it differs from merit increases, which are typically permanent pay raises once they are in effect.
A merit increase will usually be applied in one of three ways. The first is an increase in salary, for those who are not paid hourly. This is often a percentage increase; for example, a two percent or five percent increase in salary over the entire year.
Hourly merit increases are slightly different, and are generally just a basic pay increase added on to the hourly wage. For example, if a worker makes $8 US Dollars (USD) per hour, an hourly merit increase might make his pay $8.50 USD per hour. Percentage increases are less commonly used on an hourly wage, but that is a possibility as well. Finally, the third type of merit increase is, as mentioned above, an increase in wage based on both cost of living and merit.
Many companies offer cost of living increases to their employees every year. This means that every employee will have an increase in pay, whether it is based on hourly or salary rates. On top of that base amount, however, is where the merit increase is determined. This method of pay increase is often found to be more fair for everyone, because everyone gets a pay increase, but those who perform best in their jobs are further rewarded.
Merit increases may be determined differently in every company. Job performance, efficiency, or a willingness to take on extra projects or help others are criteria that are often considered. Merit increases are typically a private matter that are not shared with others in the company, the way a standard, across-the-board percentage increase may be shared.