A merit increase is a raise tied specifically to an employee's individual job performance, separate from cost-of-living adjustments or minimum wage law. Here's how it differs from other kinds of pay increases, and how large one typically is.
What Is a Merit Increase?
It's a pay raise an employer chooses to give based on how well an individual employee performed, usually following an annual or periodic performance review. Unlike minimum wage increases, which are set by law and apply to everyone earning at or near the floor, a merit increase is entirely at the employer's discretion and varies from employee to employee based on performance.
A merit increase is granted at an employer's discretion based on individual performance; it is not required by any wage law, unlike a minimum wage increase, which applies uniformly to covered employees regardless of performance.
Merit Increase vs. Cost-of-Living Adjustment (COLA)
A cost-of-living adjustment (COLA) raises pay to keep up with inflation and typically applies broadly, sometimes to an entire workforce or automatically under a union contract or state law. A merit increase is individual and performance-based instead. Employers can offer both in the same year: a COLA to keep pay in line with inflation, plus a merit increase on top for employees who performed especially well.
Merit Increase vs. Minimum Wage Increase
A minimum wage increase is a legal requirement set by federal, state, or local law and applies to every covered employee earning below the new rate, regardless of performance. A merit increase is voluntary and employer-determined. An employee already earning above the new legal minimum wage doesn't get an automatic raise when the minimum wage rises; a merit increase is a separate decision entirely.
How Large Is a Typical Merit Increase?
Merit increases vary widely by employer, industry, and individual performance rating, and there's no legal standard or requirement for the size of a merit increase since it isn't governed by wage law at all. Many employers budget a set percentage pool for merit increases company-wide, then allocate larger shares to top performers and smaller shares, or none, to employees rated lower.
Can an Employer Give a Merit Increase Instead of Following Minimum Wage Law?
No. A merit increase is entirely separate from, and can never substitute for, an employer's legal obligation to pay at least the applicable minimum wage. Even an employee who receives no merit increase in a given year must still be paid at least the current legal minimum wage for their location.
How Should Employees Prepare for a Merit Increase Conversation?
Since merit increases are discretionary rather than legally mandated, employees seeking one typically need to document specific accomplishments and performance results tied to their role, rather than relying on tenure or the general passage of time. Unlike a minimum wage increase, which happens automatically for covered employees when the law changes, a merit increase generally has to be actively earned and often actively requested.
Frequently Asked Questions
Is a merit increase the same as a promotion?
No. A promotion typically involves a change in job title, responsibilities, or level, often with its own associated pay increase. A merit increase can happen without any change in role, based purely on performance in the existing position.
Are merit increases guaranteed every year?
No. Unlike a legally required minimum wage increase, a merit increase depends entirely on employer discretion, company performance, and individual employee performance, and may not happen every year or for every employee.
Does a merit increase count toward minimum wage compliance?
Yes, in the sense that any wage paid, whatever its source, counts toward whether an employee is being paid at least the applicable minimum wage. But a merit increase itself is never required to achieve that compliance; it's a separate, discretionary raise.
Can a merit increase push a salaried employee above the exempt salary threshold?
Yes. See our exempt salary threshold checker to see whether a specific salary, after a raise, meets the current federal or state threshold.
See how minimum wage increases work by law in our state-by-state minimum wage guide, or read about how the federal minimum wage has changed over time. For official federal wage rules, see the US Department of Labor's FLSA page.