A merit matrix, also known as a merit increase matrix or salary increase matrix, is a mathematical grid that compensation professionals provide to help company managers accurately and efficiently administer salary increases to an organization’s employees.
If calculated fairly and communicated effectively, a merit matrix will generate ongoing conversations and feedback that give employees a compass in their career progression and instill a sense of pay equity. As a result of employees having more clear direction, a merit matrix can help boost employee engagement and retention.
In this article, the following questions will be answered:
- What is a merit matrix?
- How do you create a merit matrix?
- How do you calculate a merit percentage increase?
- What’s the difference between a standard merit matrix and a two-variable merit matrix?
Merit Matrix Approaches
There are two common approaches when it comes to designing a merit increase grid:
- Standard merit matrix – based on performance rating alone
- Two-variable merit matrix – based on performance rating and an employee’s position within their pay range
What Are Merit Raises Based On?
A merit increase – or merit raise – is commonly received upon meeting criteria defined within a pay-for-performance plan. These criteria help you determine how an employee’s performance should be rated, and a merit matrix calculates payouts based on those evaluations.
Depending on your organization’s compensation philosophy, you may choose a standard merit matrix or a two-variable merit matrix to determine how to administer payouts.
Standard Merit Matrix Example: Performance
In the first merit matrix example below, the highest percentage increase an employee can receive is 5% (far exceeds expectations), while other employees receive 1% to 4%, depending on their rating.
Consider your total payroll budget is $1,000,000, and you do not want to exceed $33,000 within your merit increase pool. That gives you 3.3% to play with. If you multiply “Raise for Performance” by “Percent of Employees” you will get the total percent of budget for that performance level. In this example, across all five performance categories, the sum total to payout employees is 3.07% of total payroll (i.e., $1,000,000 x 3.07% = $30,700). We are within budget!