The flat-percentage trap
Giving every employee the same annual percentage feels fair and is easy to defend in the meeting. It also guarantees that existing pay gaps grow every year, because the same percentage on an underpaid salary produces a smaller amount.
A merit cycle spends the same budget differently: where it corrects position and rewards contribution.
Step 1 — Set the budget
Express the budget as a percentage of the total salary bill, and agree it with finance before any manager sees a number. Split it if needed: a portion for merit and a separate portion for market corrections.
Step 2 — Build the merit matrix
The matrix below is illustrative: it shows how the same 4% budget is distributed by performance rating and position in range.
| Performance | Below midpoint | Around midpoint | Above midpoint |
|---|---|---|---|
| Exceptional | 8% | 6% | 4% |
| Exceeds | 6% | 4.5% | 3% |
| Meets | 4% | 3% | 1.5% |
| Below | 0% | 0% | 0% |
Step 3 — Review before approval
- Check the total against the approved budget, not department by department
- Flag every recommendation that pushes a salary above the range maximum
- Compare average increases by gender, nationality, and department
- Document the reason for every exception
Step 4 — Communicate and record
Employees accept a smaller increase they understand more readily than a larger one they cannot explain. Give managers the reasoning, not just the number, and keep the approval trail for next year's cycle.