Merit Guidelines Top Factor in Determining Salary Increases

September 14, 2010 ( - The most common methods to determine employee salary increases are salary increase/merit guidelines or ranges (79%) and manager discretion to determine pay raises (71%), according to a Mercer survey.

Less than one-fifth (17%) provide cost of living/across the board adjustments.   

In line with these findings, a Mercer news release said, merit increases are the most predominant factor included in annual budgets. Typically, organizations determine increases based on multiple approaches such as salary increase/merit guidelines or ranges, formal merit increase metrics, and manager discretion.  

To manage base salaries, almost half (48%) of organizations use an average compa-ratio or the ratio of base salary to the midpoint of the pay range. Two-thirds (67%) of organizations apply an average compa-ratio of 100% as target. Just less than one-quarter (24%) consider time to midpoint – the number of years it takes an employee that performs at expected levels to reach the salary level midpoint – when managing salaries.  

According to the news release, most organizations have a formal base salary program in place, and more than one-third (38%) have reviewed their program designs this year.  

The most common salary program design is the traditional salary structure – one that includes a midpoint of 50% of pay, a minimum of 80% of midpoint and a maximum of 120% of midpoint – used by almost two-thirds (61%) of organizations. Less than one-fifth (18%) of organizations have a wide salary structure approach characterized by fewer position grades and more extensive ranges than the traditional salary structure. Ten percent use some form of broad bands.   

Additionally, more than half (56%) of organizations have two or more salary programs with employee group/job level as the biggest differentiator between programs, followed by job family or function and geographic differentials.  

To evaluate a job position and determine its salary grade/level/band, most organizations use a market pricing or slotting approach, with 37% of organizations applying some form of job evaluation such as job levelling/classification, point factor or whole job ranking. Leading factors for determining the approach are objectivity and fairness (91%), fit with business model and organization structure (86%), simplicity in administration (63%), and ease of communication (62%).  

In addition, Mercer’s research shows that the most common reward elements linked to salary grade/level/band are annual incentive target and participation, used by 60% and 49% of organizations, respectively.  

Most organizations train their managers on their compensation programs. About two-thirds provide training when the program changes or on an ad hoc/as requested basis. Fewer (40%) provide training annually, while 11% do not provide training at all.  

The majority (80%) of organizations communicate information to employees about their base salary program, with more than half conveying base salary philosophy (58%) and employees’ full salary range (51%).  

Mercer’s 2010 Dollars and Sense Survey includes responses from nearly 550 employers across a broad selection of industries throughout the U.S. and Canada, and was conducted in July.