Merit increases solve specific problems: salary compression and pay equity gaps. They don't retain employees who've already decided to leave, and they're not a substitute for cost-of-living adjustments.
Here's what merit increases solve (and what requires a different approach):
- Merit increases fix: Salary compression, pay equity gaps, and rewarding high performance.
- Merit increases don't fix: Retention decisions already made, cost-of-living erosion, manager inconsistencies, or unclear pay policies.
Most organizations make the mistake of using a single merit increase cycle to address retention, fix equity, reward performance, and explain pay policy all at once.
If you ask a group of compensation professionals whether their most recent compensation review turned out exactly as planned, you'll notice a lot of knowingly smirking faces. Something tends to go wrong; deadlines shift, a manager asks for the same exception they requested last time, and an employee leaves a pay discussion with more questions than answers. The list goes on.
Since managing total rewards, I've run these compensation planning cycles, and each time I've realized we're simply asking too much of merit increases. Instead, here's how I handle salary review season.
Start earlier than feels necessary
Budgets usually get fixed long before your data, systems, and managers are ready, which is why the real work is creating a timeline from the start and planning for it to change.
In the current cycle, we had what seemed like two or three extra weeks at the end, but that buffer has slowly vanished, so we haven't had to inform the entire organization about the schedule change.
What does work is testing each change before it launches. Even a small adjustment can quickly add up across 50 employees and push the budget off track. Moreover, the planning never really ends; our year-end process, for instance, doesn't take place until spring, and we're already working on it.
Be clear about what merit increases can fix – and what they can’t
Merit is best for addressing specific issues (compression and pay equity gaps, in particular). Identify these before the cycle starts, because each one left unaddressed will only grow with each cycle.
For other issues, however, you need a different kind of incentive. Once someone has already taken a step towards leaving your organization, extra money seldom influences their decision. That's why merit increases don't solve employee retention problems for people who've already decided to leave.
At that point, I consider the entire range of rewards. We conducted a total rewards survey before the open enrollment period to learn what our employees value beyond their basic salary. Not everyone gets promoted every cycle, and that's OK. However, you should be able to point to the other areas where the organization is investing, such as new benefits and the amounts it pays for healthcare costs.
Finance can also be a great partner; if a leader needs a budget to make an increase, it may be worth asking whether the open requisition could be deferred to finance.
Prepare managers for the conversation, not just the worksheet
The success or failure of your compensation strategy depends on a 15-minute talk between a manager and an employee, and without preparation, the manager relies on instinct.
Inconsistencies can become apparent quickly: if one manager distributes salary increases evenly across the team (according to Payscale’s research in the 2026–2027 Salary Budget Survey), another rewards top performers, and then the teams discuss their situations, you will create tension with both managers and employees.
Even if managers claim they've already heard this advice, you should run training every cycle, since your strategy may have changed and new managers are continually joining.
Ask managers to take responsibility for their decisions, including why a particular person ended up in a certain position. Employees should be prepared as well. Emotions can rise during these conversations, and that's normal as long as both parties are willing to discuss them.
Use your seat at the table for your people
It's not enough just to have the team say yes or no; being invited to the table usually involves holding the budget line and also means speaking up for employees, like the high performer who never asks for what they deserve, the one who is affected by an equity gap, or the employee whose manager shows preference to some.
Safeguarding the business and looking after your people are both part of the job.
Close the loop on feedback
Check in with employees and managers while the cycle is still fresh, then act on the feedback you receive. Even if your intention in running the survey was good, ignoring the results can cause real harm. If you can't make a change at this stage, state that clearly and give the reason why. Otherwise, employees are likely to construct their own version of events, and that version will probably not be complimentary.
Move toward always-on compensation
Each year, Payscale runs two rounds: a main round at the start of the year that is open to all employees, and a separate midyear round for promotions that must be handled quickly.
We are currently considering a change to quarterly cycles (see the 2026 Compensation Best Practices Report for more). The aim is to reward high-performing employees regularly rather than simply acting quickly to prevent them from leaving, and also to consider the cost of not replacing someone, not just the cost of carrying out the replacement.
The same reasoning holds true for the cost of living. A merit increase is not a cost-of-living adjustment, and a roughly 3% rise will not keep pace with inflation.
That is why regular market benchmarking matters. Refresh your benchmarks once or twice a year to confirm that employees are still being paid fairly and competitively for the work they do. Merit increases, market adjustments, and cost-of-living changes each solve a different problem. Treating them as one and the same can create confusion and leave real pay gaps unaddressed.
Want to learn more?
This piece draws on my Compference®26 session, "Your compensation review season playbook."
Watch the full conversation with Zach Jamieson, director of people partners and operations at Payscale, and Tarik Bazzy, compensation manager for North America at SC Johnson, to hear how they approach review season.
Explore Payscale's Navigating the Compensation Cosmos hub for step-by-step guidance, tools, and resources to run your review season with confidence.
