Merit cycles are a complicated topic. The compensation landscape is constantly evolving, and it can be hard for even experienced comp professionals to stay on top of the latest changes. Don’t stress—this article has you covered on all your merit cycle questions. 

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It’s worth noting at the outset that merit cycles are different for every company. Variables like time, budget, and communication practices will differ depending on the organization. While there is no standard, one-size-fits-all merit cycle, Pave’s research and customer work points to some patterns that represent industry norms.

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Let’s dive into some of the most frequently asked questions about merit cycles, along with answers and related resources.

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What is a merit cycle?

A merit cycle is the process for determining salary adjustments for employees. This is typically based on utilizing the compensation system of merit pay, whereby individual performance determines base pay increases. In a merit cycle, managers determine whether an individual’s performance meets certain criteria, and then they have an opportunity to award their employees with compensation changes. 

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The merit cycle is only the merit adjustment process. Many companies even separate performance reviews and the merit cycle by multiple months in order to not conflate performance reviews, feedback, and career development with compensation.

Are merit cycles always based on performance?

No, merit cycles aren’t always based on performance. Comp leaders often use merit cycles to make market adjustments to situate employees within their compensation bands or to make cost-of-living adjustments (COLA). This can be done in parallel with merit adjustments or as a pre-adjustment to the merit portion of the cycle. It’s also worth noting that not all companies determine pay based on performance ratings.‍

Where does market data come from?

Traditionally, the market data to run merit cycles comes from either public records, benchmarking, or a combination of both. Prior to the launch of compensation management software and data tools like Pave, most human resources professionals used compensation surveys to obtain market data. 

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The market data in compensation surveys comes from comp leaders who report their organization’s data to the survey provider. The data is collected on a regular basis, typically annually or several times per year. The market data from a real-time benchmarking provider like Pave comes from direct integrations with users’ human resources information system (HRIS). This means the data is refreshed constantly, rather than on a delay with surveys.

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When do merit cycles happen?

Most companies perform a merit cycle on an annual basis, sometimes based on the calendar year, or sometimes based on the company’s fiscal year. The merit cycle usually starts with employee performance reviews that will ultimately inform a compensation increase, and maybe even a bonus or an additional equity grant. 

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Most employees assume the best or only time to get a raise or promotion is during that short period at the end of the merit cycle. However, it’s not uncommon for companies to run a lighter mid-year cycle to give folks a chance to be promoted more than once per year.

When do companies start running merit cycles?

Smaller companies might not run merit cycles, but as they grow and scale, the need for a formal process increases. There’s no black-and-white answer to the right size to start, but it’s common for organizations to begin running merit cycles when they’re about 150 employees. At this stage, companies tend to build out their HR and Recruiting teams, and feel the need to implement more process and structure.

Are any other terms used interchangeably with merit cycle?

When companies talk about merit pay or merit cycles, you might also hear several other terms in that conversation. These might include annual compensation cycle, focal cycle, or merit cycle planning. Certain regions and industries may vary within their compensation lexicon as well. 

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Regardless of what term is used, merit pay is ultimately an effective motivator that can link your employees’ ambitions with a reward. Running an organized and equitable merit cycle can help to drive retention, engagement, and profitability. 

What types of comp are reviewed during merit cycles?

The vast majority of merit cycles relate to base pay. If your organization offers variable pay, such as sales commission, that may also come into play. Other types of comp to consider are annual bonuses and equity grants.

What do promotions mean for compensation adjustments?

A promotion typically puts an employee into a new salary band, which is the range in which the company is willing to pay a certain role. Say you have an entry-level employee who makes $55,000 per year and the salary range for their job is $46,000-$56,000. If they perform well and get promoted, that promotion could move them up to the next salary band of $57,000-$67,000. Perhaps you set their new salary at $60,000 in order to give them room to grow within the band.

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It’s common for salary bands to overlap in order to take into account tenure and performance, allowing companies to pay for experience for certain roles. Lastly, comp leaders can also consider granting more equity to employees who get a promotion, in addition to any salary adjustments.

Are equity refreshers included in merit cycles?‍

Equity refreshers are sometimes included in merit cycles, though it often depends on the structure of the refresher program. 

Who actually runs the merit cycle?

Who runs a merit cycle varies widely by the size and stage of an organization. Sometimes comp planning and merit cycles will be only one person’s responsibility, while other companies will have a whole compensation or Total Rewards team. 

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For companies that aren’t large enough to staff a compensation manager role or a head of compensation, overseeing the merit cycle will require collaboration from a few groups. This extended team might include stakeholders from Finance, People Ops, Human Resources, and other company leaders. It may also include the front-line managers who allocate budget for raises across their direct reports.

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How should companies measure the success of merit cycles?

Comp and Total Rewards leaders should, at the very least, track three key metrics to measure the success of merit cycles: budget adherence, timeliness of cycle, and adherence to compensation philosophy. These metrics will help you to have a holistic view of how the cycle went. 

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You can also use a retrospective for merit cycles to help you deliver exceptional and more efficient merit cycles, as well as to celebrate the hard work of your compensation team. Download our Merit Cycle Scorecard Template to help you get started.

What are the most common types of merit cycles?

There are numerous approaches to merit cycles and employee compensation. That said, these are the three most common ways that companies structure merit recommendations: 

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• The Flat Recommendation: Every employee gets the same recommendation percentage, regardless of performance. Many people refer to this one as the “peanut butter” approach. 
• The Standard Merit Matrix: Increases are directly correlated to an employee’s performance, meaning higher performers get higher increases. 
• The Multivariable Merit Matrix: increases are based on multiple variables, such as performance and position within the salary band. 

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For more details on these three approaches, check out our blog post: How should merit recommendations be structured?

How long do merit cycles typically take to execute?

Timelines can vary, but many companies can spend a few months running merit cycles. It’s important to note that several weeks are often spent in the preparation phase, which involves planning the process and training managers before the cycle even begins.

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The timeline of merit cycles can also depend on systems and processes. If your company lives in spreadsheets, merit cycles can take longer to execute due to the manual nature of the workflows. This can cause the need to extend deadlines, causing pain points for leaders and employees alike. 

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Integrated software tools can help cut down the time spent on executing a merit cycle. Partnering with a streamlined compensation platform helps comp leaders to more efficiently and effectively run merit cycles and communicate the outcomes. 

Why are merit cycles difficult and often dreaded for HR teams?

Merit cycles have historically been an extremely manual process. Many HR and comp professionals are all too familiar with the work of cobbling together compensation reports and creating spreadsheets for every manager—all of which have to be approved, submitted, and resubmitted. For an organization with 1000 employees, for example, HR might have hundreds of spreadsheets to send out and eventually merge, calculate, and so on. 

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To make things more difficult, lean People Operations teams often take on many other responsibilities in addition to merit cycles, such as bonus plan design, equity strategy, and communications. Combine those variables, and it’s easy to see how merit cycles are difficult and dreaded.

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How should you communicate compensation during merit cycles?

It’s important to communicate about compensation with clarity. Compensation is an emotional topic that underscores the value an organization places on an employee’s work. Preparation is key. 

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Prepare managers well ahead of time with the information they need to deliver conversations that build trust and credibility. Also, educate your broader employee base about the merit cycle process before it starts. This helps bring everyone on the same page and manage any possible assumptions or disappointment. Check out our full guide on how to communicate about compensation for more.

Who benefits most from the merit cycle?

While managers and leaders run the actual merit cycle, everyone in the organization  can benefit from the process. Employees appreciate them because merit cycles make them feel valued and can lead to bigger paychecks. Managers appreciate them because they have the opportunity to recognize their team members for their hard work and boost team engagement. 

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Merit cycles also benefit the finance team, leadership team, and board members. They appreciate a well-run merit cycle because it reinforces fiscal responsibility and establishes a sense of compensation predictability.

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What should you do once the merit cycle is over?

Executing a merit cycle accurately and efficiently is no easy task, and the final mile is critical for the organization’s talent brand and employee experience. Once the merit cycle is over, it’s a great idea for HR or People Ops teams to send out reward letters. These documents are required in some jurisdictions, but generally it’s just a best practice that the majority of companies adhere to. 

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Keep in mind, the merit cycle doesn’t need to end in a mail merge and an impersonal form letter PDF. Why not deliver your team a reward letter that’s visually engaging and celebratory? Here’s an example of of the reward letters you can create with Pave.

One last suggestion for what comp leaders should do once a merit cycle is over? Get a two hour hot stone massage—you deserve it!

Running your best merit cycle ever

Getting merit cycles right isn’t easy for any company. Questions like the ones in this article come up all the time, even for folks who have worked in the compensation space for years. This guide is meant to be a resource you can come back to over and over as your workflows evolve.‍

If you’re ready to learn how Pave can help you centralize compensation planning and manage merit cycles in one place, request a demo today!