Merit Cycle

What Is a Merit Cycle?

A merit cycle—also known as a compensation cycle or comp cycle—is the structured period during which companies evaluate employee performance and determine corresponding salary increases, bonuses, promotions, and equity adjustments.

It typically occurs once or twice a year and involves coordination across HR, Finance, and department managers. The goal is to ensure pay decisions are:

• Performance-based
• Budget-aligned
• Fair and equitable
• Aligned with company compensation philosophy

Merit cycles are a critical tool for retaining top talent, rewarding high performance, and controlling compensation spend.

Why Merit Cycles Matter

Drives Performance and Retention

Employees want to see their contributions recognized—especially through meaningful pay changes.

Brings Structure and Fairness to Pay Decisions

A formal cycle helps prevent bias, guesswork, and one-off decisions made in isolation.

Aligns Pay with Budget and Strategy

Ensures total merit increases stay within budget and reflect business goals and performance.

Supports Pay Transparency and Trust

Structured reviews make it easier to communicate pay decisions clearly and consistently.

Common Challenges in Running a Merit Cycle

Manual, Spreadsheet-Heavy Processes

Many teams rely on disconnected spreadsheets to collect data, track decisions, and review outcomes.

Lack of Real-Time Compensation Data

Without access to current pay ranges, benchmarks, or employee performance data, managers struggle to make informed decisions.

Limited Cross-Functional Visibility

When HR, Finance, and department heads aren’t aligned, pay decisions can conflict with budget realities.

Equity and Compliance Risks

Without proper guardrails, pay decisions may unintentionally introduce bias or violate internal equity standards.

Best Practices for a Successful Merit Cycle

Start with a Clear Compensation Philosophy

• Define how your company rewards performance.
• Communicate expectations before the cycle begins.

Use Real-Time Compensation and Performance Data

• Integrate systems to show up-to-date salary, equity, and performance metrics.
• Enable managers to make informed decisions, not just gut calls.

Build in Guardrails and Approval Workflows

• Set rules and thresholds for raises, band limits, and budget use.
• Require approvals to ensure fairness and consistency.

Centralize the Entire Process in One Platform

• Eliminate spreadsheets and manual tracking.
• Enable HR and Finance to manage and audit the cycle in real time.

Merit Cycle vs. Off-Cycle Adjustments

Merit cycles are formal and typically scheduled, while off-cycle compensation changes occur outside of these windows (e.g., for promotions, counteroffers, or urgent retention cases). Both are important, but merit cycles provide the backbone of a company’s structured compensation strategy.

Merit Cycle

• Scheduled (usually annual/semi-annual)
• Performance-based
• Budgeted in advance
• Company-wide

Off-Cycle Adjustment

• As needed, anytime
• Situational or reactive
• May require budget exception
• Individual cases

The Bottom Line

A well-run merit cycle helps companies recognize performance, maintain pay equity, and manage compensation strategically. When automated and aligned across teams, it becomes a powerful lever for motivation, retention, and budget control—especially in fast-growing organizations.