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alexandrafeig
- February 27, 2025
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It’s that time of year—annual review season. And, if you’re lucky, annual merit increases. I’ve been a people manager at several companies of varying sizes, and having overseen many annual reviews and pay cycles, I’ve learned a lot. It’s a process that’s often confusing—and sometimes controversial. So, I thought I’d shed some light on it in this series of posts. Here’s the first one.
I wanted to write about this because I often get questions from people I manage, like, “Why can’t I just get a 20% raise?” Honestly, until I’d gone through a few of these cycles myself, I didn’t really understand how it all worked either. It can feel frustrating and opaque, so my goal here is to give you a peak behind the mysteriously annual merit cycle curtain.
First and foremost, it all depends on the type of company. Smaller or younger organizations usually don’t have structured merit or review cycles, so the following mostly applies to larger or more established companies.
In larger organizations, there’s typically a general budget for merit and promotional increases set by finance and the senior executives. It is usually determined by company performance the previous year, performance targets of the new fiscal year, and required market salary adjustments. As a middle manager, I usually see this budget in a tool like Workday, where it shows up in my merit increase “budget pool.” It might come as a lump sum or be split between merit, promotional and even RSU or stock awards.
Let’s say I have three employees. One in Japan, whose annual salary is $100,000, and two in India, each earning $50,000, for a total team salary of $200,000. Based on market adjustments, I’m allocated 2.5% for Japan and 10% for India. These percentages will be based on what we are seeing in market in terms of typical increases or adjustments. That means my merit increase pool is $2,500 for Japan (2.5% of $100,000) and $10,000 for India (10% of $100,000). In total, I have $12,500 to distribute.
Now, how do I allocate that? A 2.5% increase might be considered “standard” for the employee in Japan, which would mean giving them the full $2,500. But let’s say this employee had an outstanding year, and I want to reward them with a 5% increase instead. That’s $5,000—double the standard allocation for Japan. By doing this, I’ve used $2,500 more than planned, which means I now only have $7,500 left for the two employees in India instead of the full $10,000.
This creates a ripple effect: the two employees in India would have to share the remaining $7,500. If I were to split it evenly, each would receive $3,750, which translates to a 7.5% increase—lower than the original 10% allocation for their market. It’s a balancing act that requires careful prioritization of performance and fairness while staying within the overall budget.
At this point, I can escalate to my manager. They oversee not only my pool but the pools of others they manage. Sometimes they might have extra budget—maybe because someone resigned or another team had poor performers. In that case, it’s an easy conversation. But if they don’t have extra, they might escalate to their manager, and so on up the chain, until someone either finds additional budget or gets approval to exceed the original allocation.
Of course, it doesn’t always go smoothly. I’ve seen situations where my submission was perfectly in line with my pool, but somewhere else in the chain, someone exceeded their budget. When that happens, everyone’s numbers have to be readjusted to make the math work.
So, while as a manager I’d love to give my team all 10%, 20%, or even 30% raises—and hey, I’d love a great raise too —the reality is, we all have a budget to work within. And that budget comes from somewhere—it comes from the merit increase budget allocated for the entire company.
In my next post of this series, I’ll discuss promotions and how raises are typically approached.
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