The Pros and Cons of Giving Managers Discretion on Merit Increases

Giving managers discretion in the allocation of merit pay increases can be empowering for both the giver and receiver. On the downside, though, experts say a final employer decision on that front requires careful consideration to ensure fairness, budget compliance and consistency.

“Most organizations give their managers discretion at some level. However, we are seeing more companies providing guidance on the increase and, from there, giving the managers discretion,” said Sean Luitjens, the vice president of product strategy and partnerships at Salary.com. He added that a small but growing percentage of employers are providing “guardrails” surrounding how much the manager can then deviate from the formulaic guidance.

Nicole Long, the human resources director for the State of Georgia’s Department of Audits and Accounts, agreed that most employers offer managerial discretion, though the degree can vary significantly based on budget constraints, business priorities and economic conditions.

“Some organizations revisit this practice each cycle, granting discretion in some years and limiting it in others,” she said.

Luitjens and Long served as presenters at WorldatWork’s recent Total Rewards ’25 conference in a session dubbed “Turning Merit Lemons Into Lemoncello.” Brad Robinson, the compensation director for MasTec’s Power Delivery Group, and Rebecca McConnell, the compensation director for Konica Minolta Business Solutions, completed the panel.

Check out other Workspan Daily articles from Total Rewards ’25:

Pursue the Positives

When it comes to the pros of giving managers partial or full say on how the merit pool is divvied up, Luitjens said one clear positive is that the compensation team is likely more aligned on pay practices and with the overall corporate philosophy around rewarding performance.

“This includes [upstream and downstream sharing of] key information surrounding ranges and position in those ranges,” he said, adding that even by default, managers typically receive some control in the process in a merit matrix with the performance rating and other reviewable factors.

“An upside of giving either full control or limited deviation from the calculated guidance is managers have unique insight into the day-to-day impact of the employee for that role and on a team,” Luitjens said.

He also noted data and those insights may or not always be part of the performance rating, so allowing the manager to move the merit increase accordingly in either direction can be helpful.

Long explained giving managers that discretion can allow them to directly recognize and reward performance and behaviors that are critical to team or business unit success.

“It is a tool that supports their efforts to manage more effectively and tailor rewards to reflect real-time contributions,” she said.

Negate the Negatives

On the potentially negative side, Luitjens said frontline managers are not compensation professionals and were typically hired for reasons other than knowledge on financially rewarding their employees. In some cases, this disconnect can lead to managerial decision-making issues, which can take the form of recency bias, preference via personality and other determinants that are not affiliated with actual worker performance or pay-range position.

Additionally, many managers may resort to “peanut butter spreading” — providing the same increase for everyone — a practice that generally doesn’t align to output, can make high performers upset and exacerbate pay equity gaps.

Long acknowledged that manager discretion can introduce favoritism or bias risk. If pay disparities already exist, she said, this approach may reinforce or worsen them. Managers also might make decisions based on their own priorities, which may not align with broader organizational goals — especially if those goals are not clearly communicated or if managers are more focused on short-term outcomes.

A More Favorable Impression for Manager Discretion

So, how might organizations and their total rewards professionals proceed?

According to Luitjens, communicating a pay philosophy “in flow” is the first step for most organizations, so managers are aligned to the organization’s merit goals. From that point, there needs to be a solid merit matrix aligned to the goals, which is founded in a representative job architecture and pay-range structure.

“Without the range guidance, it becomes tremendously difficult to handle a proper matrix that aligns to the reality in the business,” he explained.

Luitjens said it’s also important to identify and mitigate risks ahead of time. For example, he said he favors preemptive analysis and modeling, which can significantly help teams get in front of pay-equity and market-pay issues and understand how the merit matrix may play out throughout the organization.

He explained that before merit increases are finalized, compensation teams should review recommendations to ensure alignment with internal equity, market competitiveness and strategic priorities. In addition, a calibration committee can be used to promote consistency across teams. If significant changes are needed during review, he said it may indicate managers need more training or clearer guidance.

Luitjens advised that an action plan could include a review of the underlying job architecture and ranges, alignment to key functions and business units, and initial modeling of the merit matrix versus budget.

“If you don’t have proper tools, I suggest at least a review of the market to see what is available to understand what is possible and the potential gap, if any, between using what you are doing currently versus a change,” Luitjens said.

Finally, he noted that organizations should then do a review three to six months post-process to determine what worked and didn’t, or if the merit plan and philosophy had the intended effect.

“This is an underutilized process that can help organizations continue to improve alignment to their business over time,” he said.

When it comes to the best of both worlds, Long concluded that providing clear, well-communicated guidelines — along with the reasoning behind them — can help managers exercise discretion in a way that aligns with organizational values and goals.

“This approach supports flexibility while maintaining consistency,” she said.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

The Pros and Cons of Giving Managers Discretion on Merit Increases

Pursue the Positives

Negate the Negatives

A More Favorable Impression for Manager Discretion

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