- A merit increase is a permanent, performance-based raise to base salary, separate from a bonus, a cost-of-living adjustment, or a market correction.
- US merit budgets average about 3.3% for 2026, with total salary increase budgets near 3.5% (Mercer), the third flat year in a row after the 2021 to 2023 surge.
- The math is simple: current salary times the merit percentage. The harder part is deciding who earns above the average, since top performers usually get 4% to 5%.
- Merit pay works only when the review behind it is fair and consistent. Vague criteria and bias are what turn a raise into a retention risk.
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How big should this year's raises actually be, and who should get them?
For performance-based pay, the answer is the merit increase: a permanent bump to an employee's base salary awarded for how well they did their job, and in 2026 the average one in the US sits at about 3.3%. It is one of the most-used tools in compensation, and one of the easiest to get wrong.
This guide covers what a merit increase is, what the 2026 numbers look like, how to calculate one, and how to run the process so the money actually buys motivation.
What is a merit increase?
A merit increase is a raise given for an individual's performance, skills, and contribution, and it becomes a permanent part of their base pay. It usually follows an employee evaluation, where a manager rates how well someone met or exceeded expectations.
Unlike a one-time bonus, it keeps paying out in every future cycle, so employers treat it as a lasting statement of value rather than a spot reward.
Because it compounds, a merit increase is one of the highest-leverage moments in the employee lifecycle.
Get it right and you keep your best people cheaply. Get it wrong and you either overpay across the board or lose the people you meant to reward. That is why it helps to know how a merit increase differs from the other raises that land in the same review cycle.
How is a merit increase different from a cost-of-living or market raise?
A merit increase rewards individual performance, while a cost-of-living adjustment (COLA) tracks inflation and a market adjustment corrects pay that has fallen behind the going rate. All three can raise base pay and show up on the same payslip, but only the merit portion is tied to how the person performed. Bonuses and back pay sit outside base salary entirely. The table below lines them up.
| Raise type | Based on | Who gets it | Added to base pay? |
|---|---|---|---|
| Merit increase | Individual performance | High and solid performers | Yes, permanent |
| Cost-of-living adjustment | Inflation | All or most employees | Yes, permanent |
| Market adjustment | External pay benchmarks | Roles that fell behind market | Yes, permanent |
| Bonus | Hitting a target or milestone | Varies by plan | No, one-time payout |
| Promotion increase | Moving to a bigger role | Employees who get promoted | Yes, permanent |
Keeping these categories separate matters at budget time, because they come out of different pools and send different signals. With the definitions clear, the next question is the one every manager asks: what is a normal merit increase right now?
What is the average merit increase in 2026?
For 2026, US merit increase budgets average about 3.3%, with total salary increase budgets (merit plus promotions and market adjustments) near 3.5%, according to Mercer's compensation planning survey. Other surveys land in the same band, so the table below shows how the major sources compare.
| Source | Merit budget | Total salary budget |
|---|---|---|
| Mercer | 3.3% | 3.5% |
| WTW (poll) | Not split out | 3.4% |
| Payscale | Not split out | 3.5% |
| Gallagher | Not split out | 3.2% to 3.3% |
This is the third straight year of flat budgets after the sharp jumps of 2021 to 2023. A WTW poll found most employers keeping their 2026 budgets essentially flat to 2025.
The mood behind the numbers is caution rather than confidence: SHRM reports employers are holding increases steady because of economic uncertainty. The headline average also hides a lot, so it is worth splitting out who actually gets more.
What are top performers getting?
Top performers typically pull 4% to 5%, well above the 3.3% average, because most companies deliberately skew the merit pool toward the people they least want to lose. A flat 3.3% for everyone is usually a sign the process is not really differentiating. That skew shows up by industry too.
Which industries give the biggest raises?
Technology, financial services, and other high-demand fields tend to run above the all-industry average, while slower-growth sectors sit below it. The gap is rarely more than a point or two at the budget level, but it widens fast once you layer on market adjustments for hot roles. Whatever your number, the mechanics of turning a percentage into a paycheck are the same.
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How do you calculate a merit increase?
Once you have set the percentage, the calculation is straightforward. Work through these three steps in order:
- Annual raise = current salary times the merit increase percentage.
- New annual salary = current salary plus the annual raise.
- New monthly salary = new annual salary divided by 12.
Put together, the math is quick. An employee earning $80,000 who receives a 3% merit increase gets $80,000 times 0.03, which is $2,400, raising their salary to $82,400 (about $6,867 a month before deductions).
Remember the raise also lifts the employer-side costs tied to pay, so the true budget hit runs a little higher, and what the employee feels is their net salary, not the gross. Knowing how to calculate it still leaves the real judgment call: how big should any one person's raise be?
What factors determine the size of a merit increase?
Individual performance carries the most weight, but several factors shape the final number. These are the ones that move it most:
- Individual performance: the quality and impact of the work, ideally measured against clear key performance indicators rather than a gut feel.
- Company budget: the total merit pool caps how much can be shared, no matter how strong the reviews are.
- Market rates: what competitors pay for the same role sets a floor you ignore at your peril.
- Role and level: senior and hard-to-replace roles usually justify larger adjustments.
- Manager recommendation: a supervisor's rating and endorsement usually anchor the decision.
- Business priorities: skills the company is betting on get protected first when budgets are tight.
Weigh these together and the right number for each person becomes clearer. Merit pay is not the only lever, though, so it helps to know what else is on the table.
What are the alternatives to merit pay?
Merit pay is one tool, and most companies pair it with other incentives so a flat budget year does not mean a flat reward story. The most common alternatives are:
- Bonuses: one-time payouts tied to a target or milestone, from performance bonuses to a joining bonus, that reward results without permanently raising base pay.
- Profit-sharing: a slice of company profit that ties individual effort to overall outcomes.
- Equity or employee stock options: a stake in the company, common at startups, that rewards long-term commitment.
- Incentive pay: variable pay linked to specific goals like sales or delivery, focused on near-term targets.
- Recognition programs: awards and public acknowledgment that lift morale at low cost.
Used alongside merit pay, these keep motivation up even when base-pay budgets are tight. Before leaning on any of them, though, it is worth weighing what merit-based pay does well and where it breaks down.
What are the pros and cons of merit-based pay?
Merit pay rewards the right people, but only when the evaluation behind it is fair and consistent. It helps to look at both sides.
What are the advantages?
At its best, merit pay motivates high performance, helps retain top talent, and ties compensation to real contribution rather than tenure. It focuses the team on the goals that matter, and when it is applied transparently, it feels fair. Those upsides only hold, though, if you avoid the failure modes on the other side.
What are the drawbacks?
Subjective reviews can introduce bias, an overemphasis on individual reward can hurt teamwork, and employees who miss out can disengage. It is also administratively heavy, and if people see it as unfair, it can push out the very performers you meant to keep. The fix is not to scrap merit pay but to run it well, which comes down to process.
How can you run a fair merit increase process?
A fair process comes down to clear criteria set in advance and applied consistently. These six steps keep it honest:
- Set performance metrics up front, so people know what they are being measured against.
- Fix the merit budget, then decide how it splits between average and top performers.
- Evaluate performance with a mix of self, peer, and manager input to reduce single-rater bias.
- Calibrate ratings across managers so a 4 out of 5 means the same thing on every team.
- Communicate each raise clearly, and make sure payroll administration reflects the new number on the right pay date.
- Review the outcome, checking whether engagement and retention actually improved.
Done consistently, this turns merit pay from a source of resentment into a real retention tool. It gets harder the moment your team spans locations and you have to run payroll for a distributed team while keeping every raise compliant. That is where the right partner earns its keep.
How does Wisemonk help you get compensation right?
Wisemonk is an India-native Employer of Record that helps global companies hire, pay, and retain people without setting up a local entity. We benchmark compensation against real market data, run compliant payroll so every merit increase lands correctly and on time, and design benefit structures that improve take-home pay and retention.
Instead of guessing at raise budgets or wrestling with payroll rules, you get a partner who handles the mechanics end to end.
Here is what that looks like in practice, in our clients' own words:
"Wisemonk has helped us hire the right people for a Canadian entity. The process is so smooth we don't even notice that our payroll spans two countries." - Dinesh A., Co-founder and CTO
"Wisemonk has hired high-quality candidates that impressed us, and the team is responsive to our requests and changes over Slack, a shared hiring tracker, email, and calls." - Dan Sampson, VP of Engineering, Cobu
We are one of the strongest EOR providers in India. We know Indian employment law, payroll, and statutory compliance because it is what we work on every day, and we are planning our expansion into future markets such as the US and the UK.
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Frequently asked questions
What is the average merit increase in 2026?
For 2026, US merit increase budgets average about 3.3%, with total salary increase budgets near 3.5%, according to Mercer. WTW, Payscale, and Gallagher land in the same 3.2% to 3.5% band, marking the third straight year of flat budgets after the 2021 to 2023 surge.
Is a merit increase the same as a raise?
A merit increase is one type of raise, awarded specifically for individual performance. Other raises include cost-of-living adjustments tied to inflation and market adjustments that correct pay against external benchmarks. All raise base salary, but only the merit portion is earned through performance.
Are merit increases permanent?
Yes. A merit increase is a permanent addition to base salary, unlike a one-time bonus. It keeps paying out in every future cycle, which is why employers treat it as a long-term commitment rather than a spot reward.
How do you calculate a merit increase?
Multiply the current salary by the merit percentage to get the annual raise, then add it to the current salary. For example, a 3% merit increase on $80,000 is $2,400, raising the salary to $82,400. Divide by 12 for the new monthly figure.
What is a good merit increase percentage?
In 2026, the US average is about 3.3%, so anything at or above that is competitive. Strong performers commonly receive 4% to 5%, because employers concentrate the merit pool on the people they most want to keep. A flat percentage for everyone usually signals the process is not differentiating.
Do merit increases raise employer costs beyond the raise itself?
Yes. Because employer-side payroll costs are calculated on pay, raising a salary also raises the taxes and contributions tied to it. The true budget impact of a merit increase is always somewhat higher than the raise amount alone, so it is worth modeling the loaded cost.
How often are merit increases awarded?
Most companies award merit increases once a year, usually after the annual performance review. Some add off-cycle adjustments to retain a high performer or correct pay that has fallen behind the market between review cycles.
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