Sample Merit Increase Guidelines Budget Allocation

Sample_Documents

DISCLAIMER: This is a sample template provided for informational purposes only. It does not constitute legal, tax, or financial advice. Organizations should consult their own legal and tax advisors and tailor this document to reflect their specific business needs, geographies, and applicable laws.

Document Header

Field	Value
Document Title	Merit Increase Guidelines & Budget Allocation
Company	<Company Name>
Document Type	Merit Increase Guidelines & Budget Allocation
Category	Base Compensation
Version	<Version>
Effective Date	<Date>
Merit Increase Effective Date	<Date>
Planning Window	<Date> to <Date>
Review Cycle	<Annual/Semi-Annual>
Next Review Date	<Date>
Document Owner	<Total Rewards Leader/Title>
Approvers	<CHRO>; <CFO>; <CEO or Delegate>
Supersedes	<Prior Document Title and Date>
Related Documents	Sample_Documents; <Salary Structure Policy>; <Performance Management Policy>; <Pay Equity Policy>; <Promotions Policy>; <Job Architecture>

Purpose and Objectives

• Provide a standardized approach to allocating and administering annual merit increases across <Company Name>.
• Align base pay adjustments with individual performance, position in range, market movement, and budget constraints.
• Ensure equitable, compliant, and well-governed merit decisions that support talent retention and business outcomes.
• Clarify roles, timelines, calculations, and approval thresholds for the merit cycle.
• Enable consistent communication to employees and managers regarding the merit process and outcomes.

Scope and Applicability

In Scope

• All regular employees of <Company Name> in eligible employment classifications (e.g., <full-time>, <part-time> with scheduled hours of <X> or more per week) who have completed at least <X> months of service by <Date>.
• Employees on base salary structures (hourly and salaried) in <Country> and <Additional Countries> where local laws permit merit increases.
• Annual merit budget planning, allocation, and distribution for the fiscal year starting <Date>.
• Interaction with performance ratings, compa-ratio, and pay ranges.
• Lumpsum awards where employees are at or above range maximum.

Out of Scope

• One-time or off-cycle pay actions unrelated to the annual merit cycle (e.g., spot bonuses, market adjustments outside the cycle, retention awards).
• Promotions and job reclassifications processed under the <Promotions Policy> and <Job Architecture>.
• Minimum wage compliance adjustments mandated by law that occur off-cycle.
• Long-term incentives, variable pay, and bonus programs governed by separate policies.

Applicability

• Unless a country, subsidiary, or bargaining agreement explicitly specifies otherwise, these guidelines apply globally to <Company Name>.
• Country-specific deviations require documented legal justification, approval by <CHRO> and <CFO>, and an appendix to this document.

Guiding Principles

• Pay for Performance: Differentiate merit increases based on individual performance and impact, consistent with calibrated ratings.
• Market Competitiveness: Move pay toward market-aligned ranges while considering compa-ratio and range penetration.
• Equity and Inclusion: Regularly test outcomes to avoid adverse impact and mitigate systemic bias.
• Affordability and Stewardship: Operate within approved budgets; use funds to address critical compression and retention risks.
• Simplicity and Transparency: Provide clear guidelines and tools for managers; communicate outcomes simply to employees.
• Compliance: Follow applicable laws, including pay equity, wage and hour regulations, works council consultation obligations, and data privacy requirements.

Program Overview and Design

Eligibility Criteria

• Employees must be actively employed on the merit effective date <Date> to receive an increase, unless local law requires otherwise.
• New hires on or after <Date> are ineligible; employees hired between <Date> and <Date> may receive prorated increases per the proration rules.
• Employees on performance improvement plans as of <Date> are generally ineligible or limited to 0% to <Percentage> pending HR approval.
• Employees with a base salary at or above the range maximum are eligible for lumpsum awards only, subject to budget.
• Union-represented employees follow the applicable collective bargaining agreement.

Performance Rating Linkage

• Merit increases are tied to the most recent final, calibrated performance rating for the performance year ending <Date>.
• Managers must adhere to the rating distribution guidance from the Performance Management team and complete calibration before submitting merit recommendations.
• Ratings changed after the planning window close will not automatically recalculate increases without HR approval.

Salary Structure Interactions

• Merit decisions must reference the current <Company Name> salary structures effective <Date>.
• Compa-ratio is calculated as base salary divided by the range midpoint for the assigned grade and market.
• Employees below range minimum must be brought to minimum prior to any guideline percentage; any additional increase follows guidelines.
• Employees above range maximum receive the guideline as a lumpsum unless an approved exception adjusts range placement.

Lumpsum vs Base Increase

• Lumpsum awards do not increase base salary and are paid as a one-time amount on the next feasible payroll following <Date>.
• Lumpsum awards are subject to the same rating and compa-ratio guidelines, with potential caps by country or legal limits.

Budget Planning and Allocation

Budget Methodology

• The annual merit budget is developed using a top-down target of <Percentage> of merit-eligible base payroll as of <Date>, adjusted for market movement and affordability.
• Finance provides a planning envelope of <Percentage> to <Percentage> based on revenue, inflation, and headcount plans.
• Total Rewards allocates budgets to business units using a formula weighting headcount (<Percentage>), eligible payroll (<Percentage>), and workforce criticality index (<Percentage>).
• Country-level budgets consider projected inflation of <Percentage>, exchange rates of <Rate>, and statutory changes effective <Date>.
• Budgets are designated as either hard (must not exceed) or soft (exceptions allowed with approval). Default is hard at the company level and soft by cost center.

Allocation Level	Basis	Example
Company Total	Eligible payroll	<Amount> at <Percentage> target = <Amount> budget
Country	Market movement, inflation, currency	<Country> at <Percentage>; <Country> at <Percentage>
Business Unit	Headcount, critical roles	<BU A>: <Amount>; <BU B>: <Amount>
Cost Center	Eligible payroll	Calculated proportionally to current payroll

Merit Matrix Guidelines

• The matrix below provides guidance by performance rating and compa-ratio band. Ranges are illustrative and should be replaced with <Company Name>-specific values.

Compa-Ratio Band	Rating 5 Outstanding	Rating 4 Exceeds	Rating 3 Meets	Rating 2 Partially Meets	Rating 1 Does Not Meet
Below 80%	6%–8%	4%–6%	3%–4%	0%–2%	0%
80%–90%	5%–7%	3%–5%	2%–3%	0%–1%	0%
90%–100%	4%–6%	3%–4%	2%–3%	0%–1%	0%
100%–110%	3%–5%	2%–3%	1%–2%	0%	0%
110%–120%	2%–3%	1%–2%	0%–1%	0%	0%
Above 120%	0%–2% (lumpsum)	0%–1% (lumpsum)	0% (lumpsum)	0%	0%

• Managers may deviate within the ranges to address compression, flight risk, or internal equity, subject to budget availability and approval thresholds.

Proration Rules

• New hires between <Date> and <Date>: prorate by months of service completed by <Date>.
• Leave of absence: prorate by paid time status according to country policy; protected leaves may not be prorated where prohibited by law.
• FTE status: prorate increases for part-time employees based on FTE.
• Example formula: Prorated Increase % = Guideline % x (Eligible Months / 12) x FTE.

Promotions and Adjustments

• Promotions effective between <Date> and <Date> receive promotional increases per the <Promotions Policy>, typically <Percentage>–<Percentage>, and may receive a reduced or no additional merit increase to avoid compounding.
• Market adjustments, internal equity corrections, or minimum wage changes should be processed prior to merit to ensure accurate compa-ratios.

Off-Cycle Increases

• Off-cycle increases outside the merit window require documented justification, HRBP sponsorship, and approvals per thresholds.
• Off-cycle adjustments count toward the fiscal year merit budget unless explicitly excluded by <CFO>.

Red-Circled and Below-Minimum Employees

• Below minimum: bring to minimum first, then apply guideline percentage on the new base if budget permits.
• Above maximum: pay guideline as lumpsum; no base increase without approved structural change.

Geographic and Currency Considerations

• Country-specific ranges may be adjusted to reflect inflation, statutory increases, or currency volatility.
• Finance will publish exchange rates for planning on <Date>; use these rates for budget conversion and reporting.
• Local legal constraints (e.g., <Country> salary increase notice periods) must be respected and may require timing adjustments.

Rounding Rules

• Round percentage increases to the nearest 0.1% and final salaries to the nearest <Currency Unit> in alignment with payroll system constraints.
• Minimum increase amount is <Amount> to avoid de minimis changes, unless legal or system constraints apply.

Process and Timeline

Annual Cycle Timeline

1. Set budget envelope with Finance: complete by <Date>
2. Update salary structures and matrix: complete by <Date>
3. Finalize performance ratings and calibrations: complete by <Date>
4. Open manager planning window: <Date> to <Date>
5. HRBP review and validation: <Date> to <Date>
6. Executive approval: complete by <Date>
7. Works council or consultation (if applicable): <Date> to <Date>
8. Payroll processing and QA: <Date> to <Date>
9. Effective date and employee notifications: <Date>

Roles and Responsibilities

• Board/Compensation Committee: Approves enterprise-wide merit budget assumptions, if applicable.
• CEO/CFO: Approve company-level budget, endorse allocation strategy, and authorize exceptions above thresholds.
• CHRO/Total Rewards: Own program design, matrix guidelines, tools, controls, and training; monitor pay equity and outcomes.
• HR Business Partners: Advise leaders, ensure guideline adherence, review exceptions, and support calibration.
• People Managers: Recommend increases within budget and guidelines; provide rationale; communicate outcomes to employees.
• Finance: Provide affordability guidance, approve budget, validate spend forecasts, and manage currency impacts.
• HRIS/Comp Systems: Configure planning tools, reports, and workflows; ensure data integrity and security.
• Payroll: Implement approved changes accurately and on time; ensure tax and withholding compliance.
• Legal/Compliance: Advise on regulatory requirements; review communications where needed.
• Employees: Engage in performance conversations and acknowledge merit letters.

System and Data Requirements

• Core data snapshot as of <Date> including employee ID, job, grade, location, base salary, FTE, hire date, leave status, and performance rating.
• Salary structures effective <Date> with minimum, midpoint, maximum for each grade and market.
• Budget files by cost center with available spend and guideline reference tables.
• Security roles granting managers access to direct reports only; HRBPs to assigned populations; and audit trails enabled.
• Data validation reports highlighting missing ratings, out-of-range salaries, negative proration, or duplicate records.
• Planning tool configured for:
  • Real-time budget tracking at cost center and roll-up levels
  • Compa-ratio and range penetration calculations
  • Exception routing based on thresholds
  • Export files aligned to payroll file specifications

Governance, Controls, and Approvals

Approval Thresholds

Scenario	Approval Path
Increase within matrix range and within cost center budget	Manager approves; HRBP reviews; auto-approve
Increase above matrix range by up to <Percentage> or budget overrun up to <Percentage>	Manager; HRBP; BU Leader approval
Increase above matrix by more than <Percentage> or budget overrun above <Percentage>	Manager; HRBP; BU Leader; CHRO approval
Any action creating pay above range maximum	TR review; CHRO approval; CFO confirmation if base increase
Country deviation from policy	Legal; TR; CHRO; CFO approval

Controls and Audits

• Hard-stop validations prevent submission if budgets are exceeded at the cost center level unless exception workflow is triggered.
• Exception reports list all out-of-guideline increases with manager rationale fields.
• Pre-payroll QA includes sample testing of calculations, proration, and rounding checks.
• Post-cycle audit compares outcomes by gender, ethnicity (where lawful), age band, tenure, and location; corrective actions documented.
• Records retained for <Years> years in compliance with data retention policy.

Risk Mitigation

• Conduct pay equity analysis before and after merit decisions; address outliers with targeted adjustments.
• Avoid blanket percentage increases that may worsen compression; use targeted ranges.
• Require written justification for 0% increases to employees rated Meets or higher unless constrained by budget and approved by HR.

Legal, Compliance, and Risk Considerations

• This document is not a contract or a promise of pay. Employment remains at-will where legally permitted.
• Compliance with pay equity and anti-discrimination laws is mandatory; outcomes must not disproportionately disadvantage protected classes.
• Works council or employee representative bodies in <Country> must be consulted per local statute before implementation.
• Follow wage statement and effective date notice requirements in <Country/State>.
• Protect personal data under <GDPR/CCPA/Local Law>; limit access to need-to-know; use secure systems for planning and approvals.
• Observe local restrictions on withholding merit increases during protected leaves or for specific employee categories.

Implementation Guidelines for Total Rewards

1. Confirm company-wide merit budget with Finance and obtain written approval by <Date>.
2. Update salary structures effective <Date> and publish compa-ratio bands and range maximums for all grades and markets.
3. Finalize merit matrix ranges and proration rules; load into planning tool by <Date>.
4. Produce eligibility file as of <Date> and resolve data anomalies with HRIS.
5. Configure planning tool security, workflows, and exception thresholds; test with <Pilot Group> managers.
6. Deliver manager training on guidelines, budgets, and tool navigation; provide FAQ and examples.
7. Open planning window; monitor spend using dashboards; send weekly status reports to BU leaders.
8. Review exceptions with HRBPs; ensure compliance with pay equity, budget, and range rules.
9. Prepare payroll change files; complete parallel testing with Payroll to validate increases, lumpsums, and rounding.
10. Prepare and approve employee communications and merit letters; translate where required.
11. Execute payroll; validate post-payroll reports; resolve discrepancies within <Days>.
12. Conduct post-cycle analytics and document lessons learned; propose adjustments for next cycle.

Example Calculations and Scenarios

Example 1: Base Increase Within Range

• Employee salary: <Amount>
• Grade midpoint: <Amount> (compa-ratio <Percentage>)
• Rating: 4 Exceeds; guideline: 3%–5%
• Selected increase: 4%
• New salary: <Amount> x 1.04 = <Amount>
• Budget impact: increase amount <Amount> counts against cost center merit budget

Example 2: Lumpsum Above Range Maximum

• Employee salary: <Amount> at 105% of maximum
• Rating: 3 Meets; guideline: 1%–2% lumpsum
• Selected award: 1.5% paid as one-time lumpsum; base unchanged

Example 3: Proration for New Hire

• Hire date: <Date>; months of service by <Date>: 6
• Rating: 5 Outstanding; guideline: 6%–8%; selected 7%
• Prorated increase: 7% x (6/12) = 3.5%

Example 4: Below Minimum Adjustment

• Current salary: <Amount> below minimum by <Amount>
• Step 1: bring to minimum = +<Amount>
• Step 2: apply guideline on new base if budget permits

Budget Management and Reporting

• Company-level dashboard tracks planned vs. budget by company, country, BU, and cost center.
• Spend categories reported separately: base increases, lumpsum awards, structural adjustments.
• Scenario planning includes:
  • 100% guideline spend within matrix
  • Stretch scenario adding <Percentage> for critical roles
  • Constrained scenario reducing midpoints by <Percentage>
• Reports for executives summarize:
  • Average increase % by rating and compa-ratio
  • Distribution of 0% increases and rationale codes
  • Pay equity indicators pre/post (index values and variance bands)
  • Budget variance by unit and driver analysis

Manager Guidance and Good Practices

• Align choices with performance impact and market value; avoid equal-percentage allocations without rationale.
• Use the full guideline range to recognize top performers, particularly when compa-ratio is below midpoint.
• Address compression by differentiating between long-tenured and newly hired employees in similar roles.
• Document rationale focusing on performance, skills, scope changes, and market comparisons; avoid prohibited factors.
• Consult HRBP for complex cases such as dual-market roles, critical skill premiums, and retention risks.

Review and Continuous Improvement

• After the cycle, Total Rewards will assess:
  • Employee retention among high performers vs. control group
  • Movement toward target compa-ratio distribution
  • Alignment with market movement and structure updates
  • Equity outcomes and corrective actions taken
• Gather feedback from managers and HRBPs; update matrix ranges, proration rules, and tools for the next cycle.
• Update this document by <Date> or sooner if regulations or business needs change.

Review and Approval Process

1. Total Rewards prepares draft updates and circulates for review by HRBPs, Finance, Legal by <Date>.
2. Legal reviews compliance implications and notes country deviations by <Date>.
3. Finance confirms affordability and exchange rate assumptions by <Date>.
4. CHRO approves program design; CFO approves budget allocations by <Date>.
5. Communicate final program to leaders and managers by <Date>.

Glossary: Terms and Definitions

• Base Salary: Fixed compensation paid to an employee, excluding variable pay, allowances, and overtime.
• Merit Increase: Annual base pay adjustment based on individual performance and other factors.
• Lumpsum Award: One-time payment not added to base salary, used when base is at or above range maximum or as otherwise directed.
• Compa-Ratio: Employee base salary divided by the salary range midpoint for the grade and market.
• Range Penetration: Position of salary within the min-to-max range expressed as a percentage.
• Budget Envelope': Total funds available for merit increases, usually a percentage of eligible base payroll.
• Calibration: Process of reviewing and aligning performance ratings across teams for consistency.
• Hard Budget: Limit that cannot be exceeded at a given level.
• Soft Budget: Target that may be exceeded with approvals.
• Red-Circled: Employee whose salary is above the maximum of the range for the role.
• Proration: Adjustment of an increase percentage to reflect partial-year eligibility or FTE.
• Market Adjustment: Pay change intended to align with external market rates or internal equity.
• Exception: Any recommended increase outside guidelines or that causes a budget overrun.

Data Privacy and Security

• Access to merit planning data is restricted by role; sharing outside authorized channels is prohibited.
• Store planning exports in approved systems with encryption where available.
• Retain only necessary data for the minimum time required by <Company Name> policy and local law.

Appendices

Appendix A: Rationale Codes

Code	Description
PERF	Performance differentiation within guideline
EQTY	Internal equity correction
CMPR	Compression mitigation
RETN	Retention risk mitigation
MRKT	Market alignment
EXCP	Approved exception beyond guideline

Appendix B: Country Deviations (Template)

Country	Deviation Summary	Legal Basis	Approval Date
<Country>	<Description>	<Law/Regulation>	<Date>
<Country>	<Description>	<Law/Regulation>	<Date>

Communication to Employees and Managers

The following section is intended for employees and managers. It should be shared as the primary message explaining how merit increases work at <Company Name>.

At <Company Name>, our goal is to recognize your contributions and ensure our pay remains competitive in the markets where we operate. Each year, we review base pay through a merit process that considers your performance, your position in the pay range for your role, and our overall budget.

What to expect this cycle

• Timing: Your manager will discuss your merit outcome in <Month/Year>. Any approved changes will be effective on <Date> and appear on your <Pay Period> paycheck.
• Performance matters: Your most recent performance rating, finalized through our calibration process, guides your merit opportunity. Higher performance generally leads to higher increases within the guideline ranges.
• Position in range: If your salary is lower relative to the market range for your role, you may see a higher percentage increase to move you toward the middle of the range. If you are already paid toward the top of the range, your increase may be smaller or delivered as a one-time lumpsum.
• Budget stewardship: We set a company budget to ensure we invest responsibly. Managers use that budget to recognize performance while maintaining fairness across their teams.

How your increase is determined

• Your manager reviews program guidelines, your performance results, your current salary versus the pay range for your role, and any relevant equity considerations.
• They recommend an increase within the company’s guideline range. Some recommendations require an additional review by HR or leadership to ensure consistency and fairness.
• If your base pay is above the maximum of the salary range for your role, any merit recognition will be paid as a one-time lumpsum and will not change your base pay.

If you were recently hired or on leave

• If you joined <Company Name> recently, your increase may be prorated to reflect your time with us during the review period.
• If you were on an approved leave, your eligibility will follow local policies and laws. Your manager and HR can answer questions about how this applies to you.

Talking with your manager

• Your manager will share your new pay (or lumpsum amount), the effective date, and the reasons behind the decision. This conversation should connect your results and impact to your merit outcome.
• Please ask questions. If something is unclear, your manager can follow up with HR for additional information.

Our commitment to fairness

• We regularly review outcomes to ensure they are equitable and compliant with applicable laws.
• We do not base pay decisions on factors unrelated to job performance, skills, responsibilities, or market data.
• If you have concerns or believe there is an error, notify your manager or HR promptly so we can review and address it.

Where to get help

• For questions about your pay or eligibility, contact <HR Contact/Vendor Name> at <Email/Portal>.
• For questions about performance ratings, speak with your manager or visit <Intranet Link>.
• For payroll timing or tax questions, contact <Payroll Contact>.

Thank you for your contributions to <Company Name>. We appreciate the work you do every day and are committed to recognizing performance in a way that is fair, transparent, and sustainable.

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Document Information:

• Document Type: Merit Increase Guidelines & Budget Allocation
• Category: Base Compensation
• Generated: August 22, 2025
• Status: Sample Template
• Next Review: <Insert Review Date>

Usage Instructions:

1. Replace all text in angle brackets < > with your company-specific information
2. Review all sections for applicability to your organization
3. Customize content to reflect your company's policies and local regulations
4. Have legal and HR leadership review before implementation
5. Update document header with your company's version control information
6. At bottom of the document you find a short example on how the content could be communicated to end-users, for instance employees.

This sample document is provided for reference only and should be customized to meet your organization's specific needs and local legal requirements.