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The Most Important Aspects of a Fair Merit Increase Transparency, reliability and frequent feedback should all be part of your bonus procedure.

By Matt Straz Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.


Equal pay has once again become a major debate: It's frequently mentioned by the Democratic candidates. And to help address the problem, the U.S. Equal Employment Opportunity Commission recently announced a proposal requiring employees to disclose more pay data.

Related: 4 Smart Ways to Increase Employee Retention

Individual states, like New York and California, have also introduced stricter legislation regarding equal pay and discrimination in the workplace.These new laws require employers to evaluate their pay methods, and determine if they are truly fair. But, one area remains a little fuzzy -- merit increases.

While each HR team may have its own terminology surrounding pay raises, a merit increase, traditionally speaking, is a raise in an employee's salary based on high performance. A 2015 report from Aon Hewitt found that employers surveyed spent a record amount on compensation last year, with the major portion of those funds going toward variable pay such as incentives and bonuses.

Still, the question remains: Are merit increases fair, and how can employers prove that they are?

Here are several critical aspects for merit increases that employers need, to ensure they reward employees fairly:

1. Transparency

Do employees know how merit increases are determined? Do they know the specific reasons why they received a merit increase? Probably not.

Another 2015 survey from Aon Hewitt looked at employee engagement and benefits and found that bonuses were the benefit employees understood the least: Some 64 percent of employees surveyed said they didn't understand their employer's bonus structure. And that's a problem. Because if employees don't know how bonuses are determined, they're probably unclear on the logic behind merit increases, as well. And, when employees don't know bonus details, they may feel undervalued and discriminated against.

A survey of 71,000 employees by PayScale found that one of the top predictors of employee satisfaction and their intent to leave their jobs was a company's ability to communicate clearly about compensation. In the study, women who were paid above the industry average for their positions were 18 percent more likely to think they were underpaid than men in the same pay bracket.

Even when men and women in the study were paid the same, women were still more likely to believe they were underpaid. So, perception figures in here: When employees don't know they whole story, they're more likely to think they are being treated unfairly.

Clearly, a merit increase needs to be transparent to the employee, to be fair. So, discuss with employees how these increases are determined and what criteria are used to evaluate their performance. If it's possible to standardize criteria company-wide, share those policies on HR software or other internal platforms to allow every employee to easily access this information. When awarding increases, show employees how they specifically did or did not meet the criteria.

Related: 5 Bonuses Employees Love No Matter What the Time of Year

2. Reliability

Who determines merit increases? Is it the direct manager or supervisor, or do multiple leaders share their input?

Merit increase decisions typically fall to one manager, and without proper training and resources, those decisions aren't always fair. A manager sees only one side of an employee's performance, and the fuller the picture he or she can get from coworkers or even other leaders, the better. Particularly if the employee being reviewed is higher up, try to loop in smaller performance reviews from department heads to support fair merit increases.

HR software can also help. Software allows supervisors to collaborate on their decisions by showing a 360-degree view of an employee's performance. Peer feedback, input from supervisors and performance data can all be collected and stored in one place, making a full analysis of performance more feasible.

Along the way, performance-management training for all managers will help standardize how your company talks about salary with your employees. From new managers to the most experienced ones, staffers should brush up on their use of precise language and the way they speak as representatives of the company.

3. Frequent feedback

Are merit increases based on a yearly performance review? Do employees have only one shot to wow their managers?

If individual performance is looked at solely during a yearly review, employees are missing out. Annual performance reviews don't allow employees enough chance to improve; they need continual feedback so they can always strive toward growth.

Instead, track and review employee performance more frequently. Let employees know which areas they can improve on so they have a fair chance to perform well -- and maybe even earn a merit increase.

Do your merit increases include these aspects? How else do you keep them fair for all employees?

Related: Houston Energy Company Gives $100,000 Bonuses to Each of Its 1,381 Employees

Matt Straz

Founder and CEO of Namely

Matt Straz is the founder and CEO of Namely, the HR and payroll platform for the world's most exciting companies.

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