Worked example: 4% pool on $1.2M payroll
The pool is $48,000. Giving 20% top performers 7%, the middle 70% 3.5%, and the bottom 10% nothing blends to 3.85% — $46,200, slightly under budget. The remaining $1,800 can fund off-cycle adjustments or a spot-bonus line. Had everyone received a flat 4%, the top decile would read it as a cost-of-living adjustment, not recognition.
- • Separate merit from promotion and market-adjustment budgets — blending them hides compression.
- • Communicate the pool math to managers; quiet overspend compounds into next year's base.
- • Zero for the bottom tier only works alongside an actual performance conversation.
FAQ
What is a typical merit increase budget?
US employers budgeted roughly 3.5–4% of payroll for 2026 merit cycles, with additional smaller pools for promotions (1–1.5%) and market adjustments. High-inflation years pushed budgets to 4.5%+; the trend has been easing.
How do you allocate a merit pool?
By performance tier: a common split gives top performers (10–25% of staff) 6–9%, solid performers 3–4%, and low performers 0–1%, tuned so the blended spend equals the pool. Managers propose, HR calibrates.
Should low performers get any raise?
Usually zero merit increase, paired with a clear performance plan. Giving 2% to everyone flattens the signal your best people watch most closely.
What is pay compression and why does the merit cycle matter?
Compression happens when new-hire market rates rise faster than incumbent raises, so juniors approach senior pay. The merit pool — especially the market-adjustment slice — is the main tool for fixing it before resignations do.
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