Merit raises are pay increases issued by employers based on an employee's performance, usually graded in relation to goals or benchmarks set in advance.
Merit raises are offered by employers as incentive for employees to meet or exceed preset business goals or performance criteria. These are usually set at the time of hiring or during subsequent individual performance reviews. Merit-raise criteria can change as an employee's skill level increases or as economic forces dictate.
Merit Vs. Bonus
A merit raise is applied to an employee's pay (whether weekly, biweekly or monthly) as a dollar amount or percentage increase in hourly rate or salary, whereas a bonus is generally a lump sum awarded by an employer at the end of a fiscal or calendar year or quarter.
Merit Vs. Cost of Living
Employers may give cost-of-living raises to employees to offset inflation. They are not tied to performance of an employee's duties. Merit raises are awarded on an individual basis according to performance.
Employers have wide discretion on what size merit raises they offer. The amount can vary based on individual employee performance and may be tied to a company's stock price, cash flow, profit or sales. Merit raises are strictly optional and can be discontinued with little or no notice from an employer; they are typically one of the first policies discontinued in a recession.
Merit Raises and Taxes
As with any income, merit raises are taxed. Depending on the laws where you live, taxes may be collected at the local, state and federal levels. Your merit raise could move you into a higher tax bracket.