A merit increase is a base salary increase awarded to reflect an individual's performance — distinguishing it from other types of salary increase such as cost-of-living adjustments (which apply uniformly regardless of performance) or promotion increases (which reflect a change in career level). Merit increases are the primary mechanism through which firms differentiate pay within a career level over time, rewarding stronger contributors with faster base salary growth.
In most consulting firms, merit increases are determined as part of the annual salary review cycle, informed by a combination of individual performance assessment, current market positioning (as measured by compa-ratio), and the available salary increase budget.
How Merit Increases Are Determined
The merit increase for any individual is typically the output of a merit matrix — a structured framework that combines two inputs:
- Performance rating — The individual's assessed performance level from the most recent performance management cycle, typically on a scale of three to five categories (e.g. Below Expectations, Meets Expectations, Exceeds Expectations, Outstanding).
- Compa-ratio position — Where the individual's current pay sits relative to the market midpoint for their career level and line of business. Individuals paid below the midpoint (low compa-ratio) typically receive larger increases to close the market gap; those already at or above the midpoint receive smaller increases.
The matrix produces a recommended increase range for each combination of performance rating and compa-ratio position. A high performer paid below the market midpoint will receive a larger merit increase than a high performer already paid above it; an average performer paid below the midpoint will receive a moderate increase; an average performer above the midpoint may receive little or no increase.
Merit Increases and the Salary Increase Budget
Merit increases must be calibrated within the firm's overall salary increase budget — the total pot available for base salary increases in a given year. The budget constrains the average increase across the population; the merit matrix determines how that average is distributed across individuals.
A budget of 4% of payroll does not mean every consultant receives 4%. It means the total spend on increases must not exceed 4% of total payroll, but individual increases may range from 0% to 10% or more depending on performance and market positioning. The discipline of staying within budget while meaningfully differentiating by performance is one of the central challenges of the salary review process.
Merit Increases vs Other Types of Increase
- Merit increase vs cost-of-living adjustment (COLA) — A COLA is a uniform increase applied to all employees to offset the effect of inflation on real pay. It is not performance-differentiated and is applied regardless of individual contribution. Many firms apply a blend: a base COLA for all employees plus an additional merit element for strong performers.
- Merit increase vs market adjustment — A market adjustment is an increase made to correct a specific pay positioning problem — typically bringing a consultant whose compa-ratio has fallen materially below the market midpoint back into the target range. Market adjustments are often made outside the standard merit cycle when competitive pressure is acute.
- Merit increase vs promotion increase — A promotion increase reflects advancement to the next career level and moves the consultant into the pay range for that level. It is distinct from — and usually larger than — a merit increase, which operates within the current level's pay range.
Benchmarking Merit Increases
Consulting firms benchmark their merit increase budgets against market data to ensure they are investing sufficiently in salary growth to maintain competitive positioning. Vencon Research publishes consulting-specific salary increase data — see the insights page for current-year benchmarks — which allows firms to calibrate their budget against what peer firms are spending on merit increases in the same markets and career levels. A budget that is materially below the market average will result in competitive drift even if individual pay is currently well-positioned.