4 Key Insights from Pave’s Merit Cycle State of the Union Webinar

These days, compensation leaders are being asked to do more with less. To adapt to changing market conditions, many are reimagining how they run merit cycles, finding ways to promote, reward, and retain employees strategically. 

We set out to uncover exactly how merit cycles are changing in 2025 by analyzing Pave's dataset of cycles run in the first half of 2025. We shared our findings in The Merit Cycle State of the Union webinar, hosted by Pave Founder & CEO Matt Schulman and Octavio Cardenas, Managing Director of Employee Rewards at Alpine Rewards. 

Keep reading for four key insights, or watch the webinar to explore more merit cycle trends.

1. Companies Are Returning to Running Merit Cycles

When we explored merit cycle data from last year, we saw indications of a merit freeze, meaning 10% or fewer employees received a salary increase. When given the choice to lay off employees or forgo merit cycles, many companies choose the latter.

But now the freeze is thawing, and “companies are reverting back to normal,” said Matt.

The Merit Cycle Freeze is Thawing

While companies are running merit cycles more this year than in 2024, raises are not a guarantee. Many organizations, like Google and Amazon, are using pay for performance to allocate pay and equity increases.

“Now, raises are much more tightly tied to individual and company performance,” shared Octavio.

So, let’s take a closer look at how pay for performance is impacting merit cycles.

2. Pay & Equity Merit Increases Are Allocated to High Performers

Even though more companies are running merit cycles, salary increases across US employees are lower this year than last. This is not unexpected, given the theme of doing more with less.

While companies are giving less across the board, they’re allocating more budget to employees who get promoted. Last year, promoted employees received a median 9% salary increase, and this year that number jumped to 9.7%.

Compensation teams are trying to target their dollars towards high performers who are most likely to impact the business, further emphasizing the trend toward pay for performance. 

“We're seeing an uptick in people being promoted because companies are trying to target their dollars and make sure that they're given to people that are going to move the needle for the company. Tight funding makes companies focus on profitability and shift to pay for performance.”
– Octavio Cardenas, Managing Director of Employee Rewards at Alpine Rewards

And we’re seeing the same trend with equity refreshes. Promoted employees received a median 39% increase in ongoing equity, compared to only 20% for those rated above average and 16% for those who meet expectations.

Ongoing Equity Eligibility is Skewed Toward High Performers

3. Performance Ratings Are Slightly Inflated 

Speaking of performance, we found that smaller companies tend to have a greater percentage of employees receiving high performance ratings than larger companies.

Here’s the breakdown:

• At 1-200 person companies, 36% of employees are rated “Above Expectations”
• At 1,000+ employees, only 28% of team members are rated “Above Expectations”

This discrepancy may be due to larger companies having more experienced managers and tighter criteria, leading to more lower performance ratings.

However, across the board, we’re still seeing this so-called rating inflation, which makes it challenging for compensation leaders to allocate merit cycle funds.

Rating Distribution by Company Stage

4. Equity Vesting Schedules Are Getting Shorter

There is greater variation from company to company when it comes to equity program design, making it more complex to analyze than pay. But, after digging into the data, we uncovered some interesting insights around equity vesting.

While 4 year vesting schedules are still the standard for private companies, this is changing for public companies. Today, there's widespread adoption of shorter vesting schedules for ongoing equity grants to get value into employees’ hands faster in order to better compete in a volatile market. 

This year, 61% of public companies in Pave’s dataset have ongoing grant vesting schedules that are less than 4 years.

Ongoing Equity Grant Vesting Duration at Private & Public Companies

Manage Your Merit Cycles In Uncertain Times

Today’s uncertain economic climate makes navigating merit cycles more complicated than ever. 

But, with the access to right information, tools, and communities, like Pave Data Lab, total rewards leaders can make more informed decisions and drive business growth.

Watch the webinar to get more insights on what happened in the first half and what’s coming next.

‍

‍