The Lowdown on Merit Cycles: What You Need to Know

Have you ever wondered how companies decide when to give raises and promotions? The answer lies in merit cycles. These are regular periods when companies review performance to decide on pay increases. For employees, understanding how merit cycles work can be the key to getting the salary bump or promotion they deserve. But the ins and outs of merit cycles and timing can be confusing.

This article breaks merit cycles down in simple terms. Companies will learn the basics of cycles, from eligibility and ratings to timing and budgets. This guide also gives tips for making the most of merit cycles to get the rewards employees have earned. With this lowdown on merit cycles, employees will know how to navigate them for career success.

What Are Merit Cycles?

Merit cycles are a way for companies to assess and reward employee performance. Every 6-12 months, managers review how employees are doing and may give raises or bonuses to those who exceed expectations.

• Some companies use merit cycles regularly alongside annual cost-of-living increases.
• The goal is to motivate and keep top talent.
• Employees get feedback, can ask for career growth advice, and get a chance to make a case for higher pay or promotion.

For employees, the downside is the uncertainty and stress of waiting to hear if they will receive a boost in pay. But when done well, merit cycles are a useful tool to keep productivity and morale high.

Are Merit Cycles Always Based on Performance?

Companies do not always link merit increases to performance. Some use tenure, cost of living adjustments, or equity to decide raises.

• Tenure

Companies may give raises based primarily on the employee’s tenure. The idea behind this is that experience has value.

• Cost of living

To keep up with inflation, companies provide cost-of-living adjustments (COLAs). These raises aim to maintain employees' purchasing power.

• Equity

To correct pay inequities, companies explore how employee pay compares to industry norms and internal peers. Equity adjustments aim to make pay fair and equitable.

Performance is commonly a factor in merit increases. But it is not always the only or primary driver. Compensation can be complex with many moving parts, but understanding the "why" behind a raise helps build trust in the system.

Where Does Market Data Come From?

Market data comes from various sources, including:

• Public companies that report metrics like revenue, profit, and users.
• Private companies that share select details with data providers.
• Industry reports compiled by research firms analyzing trends.
• Government agencies releasing economic indicators like jobs reports.
• Surveys where people share details about their spending and habits.
• Sensors track traffic levels, weather conditions, and more.

When Do Merit Cycles Happen?

Merit cycles typically occur annually, biannually, or quarterly, depending on the company and industry. The most common cycles are: 

• Annual

An annual merit cycle means salary increases and promotions happen once a year, usually around the same date each year. This is a popular cycle for many large companies.

• Biannual

A biannual merit cycle occurs twice a year, such as in January and July. This allows for more frequent performance reviews and compensation changes. Some companies find that this works well for their business needs.

When Do Companies Start Running Merit Cycles?

Most companies start their merit cycle planning in the fall, around October or November. This allows HR and management to have enough time to review performance and decide on pay increases before the new fiscal year begins in January.

Some companies may start the process a bit earlier, in September, to ensure they stay on schedule. The actual merit increase, whether in the form of a raise, bonus, or both, usually goes into effect at the start of the new fiscal year.

Are There Other Terms to Describe the Merit Cycle?

The merit cycle is also known as the performance review cycle or the performance appraisal cycle. Other related terms include:

• Performance management cycle
• Pay review cycle
• Compensation review cycle
• Salary review cycle

All of these terms refer to the periodic process companies go through to evaluate employee performance and determine pay increases or bonuses. 

What Types of Compensation Does a Manager Assess during These Cycles?

Merit cycles typically review an employee’s base pay, short-term rewards like bonuses, and long-term incentives such as stock options or restricted stock. They analyze compensation elements to conclude if they need to make any changes to keep pay competitive and properly reward performance.

How Do Companies Decide on Merit Cycles?

Companies typically base merit cycles on a combination of factors. Some of the most common factors include:

• Performance reviews measure how well employees achieve key goals and meet expectations. Companies use these reviews to decide who deserves the highest pay increases and bonuses.
• Peer reviews compare employees to others in similar roles. They help identify top performers who significantly outperform their peers. They often give these employees preferential treatment in the merit cycle.
• Potential assessments assess an employee’s capacity for future growth and leadership. Those with the highest potential may receive accelerated pay increases and career growth opportunities.
• Business performance considers how well the company or team achieves key goals. When business is strong, companies may increase budgets for compensation. But when business is down, pay increases are often minimal.
• Market data on pay for specific jobs in each region informs companies if employee pay is competitive. To attract and keep top talent, pay must remain within a reasonable range of the market rate. If pay falls behind the market, larger increases may be necessary.
• Seniority acknowledges employees who have been with the company the longest. While not the only factor, companies often reward tenure to recognize loyalty and experience. Longer-tenured employees typically receive slightly higher increases. 

What Are the Usual Types of Merit Cycles?

The three most prevalent merit cycles are: 

• Annual merit cycles

The most common, with pay increases awarded once a year, typically on the anniversary of an employee’s hire date or at the start of the fiscal year.

• Semi-annual merit cycles

Provides two opportunities per year for pay increases, often in January and July. Useful for adjusting compensation to account for inflation or address retention issues.

• Quarterly or monthly merit cycles

The fastest cycles, with increases potentially awarded up to four times a year or monthly. Mainly used by companies that want maximum flexibility in compensation or for certain job categories like sales where frequent incentive pay is common.

Who Benefits Most from the Merit Cycle?

Those who benefit the most from merit cycles are typically high-performing, motivated employees. Employees who always exceed expectations and go beyond their roles are often rewarded during the merit cycles.

Managers can recognize these employees' efforts and contributions by awarding larger increases in compensation. For many determined, career-driven professionals, the potential for higher merit increases can serve as motivation to push themselves further in their jobs.

Conclusion

Now that you know what merit cycles are about, you can better navigate that annual review process and understand how your performance stacks up. While it may seem mysterious or arbitrary at times, remember that merit cycles are designed to reward employees based on their contributions.

Keep doing great work, keep communicating with your manager, and you will continue to thrive within the cycle. And if you ever feel like something is not fair during the process, speak up! With an open dialog, you can gain clarity.