Merit increases in healthcare: 2026 averages, merit matrices and how to budget

What is a merit increase?

A merit increase rewards individual performance with a percentage added to base pay. Because it goes into base, it compounds: next year's increase is calculated on the new, higher figure. Most employers run merit once a year, after performance reviews, with a single effective date.

It is one of several ways base pay moves, and they are budgeted and explained differently:

Cost-of-living adjustment (COLA) or general increase

The same percentage for everyone in a group, regardless of performance. Common in public-sector and union settings. It keeps pay level with prices or the market; it doesn't reward anyone.

Market adjustment

A targeted raise for a job or person whose pay has fallen behind the external market, usually found through compensation benchmarking. It fixes a pay level problem, not a performance one, and is best funded separately from merit.

Promotion increase

A raise for moving into a bigger job with a higher pay range, such as staff nurse to charge nurse or nurse manager. It can happen at any time of year.

Step increase

Movement to the next step on a fixed pay scale, usually on a service anniversary. Pay is set by experience and the scale, not by a performance rating. Common in union contracts and government.

Lump-sum merit

A one-time cash payment instead of, or in addition to, a base increase. It doesn't compound, so it is often used for people at the top of their range.

Average merit increase 2026: what the salary budget surveys say

Several firms publish US salary increase budget surveys each year. They don't all measure the same thing: some report the merit budget alone, others the total salary increase budget, which WorldatWork defines as merit plus general or COLA increases plus other increases. Compare like with like.

Sources: Mercer March 2026 QuickPulse US Compensation Planning Survey (756 employers; 2026 actuals, averages include zeros; healthcare row is Health Care Services) and Mercer July 2026 QuickPulse (2027 projections; healthcare row is Healthcare). Salary.com 16th annual US and Canada National Salary Budget Survey (September 2026). WTW Salary Budget Planning Report (July 2026; 1,650 US companies). WorldatWork 2026-2027 Salary Budget Survey (July 2026). Payscale 2026-2027 Salary Budget Survey (August 2026; 1,266 submissions).

What the 2026 figures say for healthcare:

• Healthcare merit budgets run slightly below the all-industry average. In Mercer's August 2025 survey, 98 Health Care Services organizations projected a 3.0% merit budget and 3.4% total for 2026. Actual 2026 increases came in at 3.0% merit and 3.3% total in Mercer's March 2026 survey, against 3.1% and 3.4% for all industries.
• The gap between merit and total budgets is where market adjustments live. If total increases run a few tenths of a point above merit, that is the money available for market, equity and other targeted raises across the whole organization.
• There is no published 2026 merit figure specific to nurses or other clinical roles in the surveys above. The healthcare rows cover all employees of healthcare organizations, clinical and non-clinical. For role-level pay movement, use a role and location benchmark instead, such as ClinicalRate salary data.

Averages also hide differentiation. In Mercer's March 2025 QuickPulse survey, among the 44% of companies using a five-tier rating scale, top performers received an average raise of 5.6% and those rated in the middle 3.3%. Mercer's March 2026 survey found only 4% of employers gave equal across-the-board increases. Most size each increase by performance and position in range, which is what a merit matrix does.

How to build a merit matrix

A merit matrix sets each person's increase from two inputs: their performance rating and where their pay sits in the range, usually measured by compa-ratio (pay ÷ range midpoint). Higher ratings get more. For the same rating, people low in the range get more than people near the top, so pay drifts toward the midpoint for solid performers and only strong performers get well above it.

1. Fix the axes. Use your existing rating scale (often 1 to 5) and three to five position bands. Compa-ratio bands such as below 0.90, 0.90 to 0.99, 1.00 to 1.09 and 1.10+ are common; quartiles of the range work too.
2. Anchor the middle cell to the budget. “Meets expectations” at or just below the midpoint should sit close to the overall merit budget.
3. Spread the rest. Step up for higher ratings and lower positions, and down for lower ratings and higher positions. Decide whether the lowest rating gets zero.
4. Check the cost. Multiply each cell by the payroll of the people expected to land in it and confirm the total matches the pool. Adjust the cells, not the budget.
5. Publish ranges, not single numbers, if managers need discretion. Some matrices give each cell a range (for example 3.0% to 4.0%) and let managers choose within it.

Illustrative merit matrix (not market data), the same default used in the calculator:

Illustrative cost check: assume 10% of staff are rated 5, 25% rated 4, 50% rated 3, 12% rated 2 and 3% rated 1, and that within each rating 20% sit below 0.90, 30% in 0.90 to 0.99, 30% in 1.00 to 1.09 and 20% at 1.10 or above. Treating everyone as earning the same:

In practice, weight by payroll rather than headcount. People high in the range earn more and get smaller percentages, so the payroll-weighted cost usually comes out a little below the headcount figure. If ratings drift upward over the years, the same matrix costs more, so re-run the check every cycle. To look up a single cell for one employee, use the matrix mode in the merit increase calculator.

How to budget a merit pool

The merit pool is the merit budget percentage applied to the base pay of eligible employees. Eligibility rules (minimum service, active status, not on a step scale) decide whose pay goes into the base.

Illustrative: a hospital department with $24,000,000 of eligible base payroll and a 3.0% merit budget has a $720,000 annual merit pool. If increases take effect with nine months of the fiscal year left, the current-year cost is $720,000 × 9 ÷ 12 = $540,000, and the full $720,000 carries into next year's base. Payroll taxes and any pay-linked benefits rise with it: employer FICA alone is 7.65% of wages (Social Security stops at the annual wage base). For the full list, see the labor burden rate guide or the employee cost calculator.

Decide up front what the pool has to cover:

• Lump sums for people at or above range max usually come out of the merit pool, but they are one-time costs that don't carry into next year's base.
• Prorated increases for mid-year hires cost less than a full merit, which frees a little budget for differentiation.
• Market adjustments and promotions are better funded from separate pools. Paying them out of merit squeezes increases for everyone else and blurs what each raise was for.
• Holdbacks. Some organizations keep a small reserve for appeals, retention cases or late reviews.

Merit, pay compression and market adjustments in nursing

Nursing pay has a structural problem that merit alone can't solve. Starting rates for new graduates are set by the hiring market, and when hospitals compete for new grads those rates can rise faster than the merit budget. Experienced nurses, who only get merit, see the gap between their pay and a new hire's shrink. That is pay compression.

Illustrative (not market data): new-grad starting rate rises 6% a year, experienced RN gets a 3% merit.

Two years of on-budget merit and the experienced nurse's premium has fallen by a third. A merit matrix that favors people low in the range helps a little, but the experienced nurse may not be low in the range at all; the range is the problem. The fixes sit outside merit:

• Move the range. If the starting rate moved, the range minimum, midpoint and maximum should move too, based on a current market benchmark.
• Fund a market or compression adjustment. A separate pool that restores a deliberate gap by years of experience, applied before merit is calculated.
• Use an experience-based hiring formula so new hires with prior experience aren't placed above long-tenured staff with the same experience.

Merit is then applied on top of the adjusted pay. To see whether a range has fallen behind, compare its midpoint against current market pay for the same role and metro, with salary data or a salary band review.

Clinical ladders and step systems in unionized hospitals

Many hospitals don't use merit for nurses at all. Where nurses are represented by a union, pay is normally set by the collective bargaining agreement:

Step scales

The contract lists a rate for each step, usually tied to years of experience, and a nurse moves up a step on a set date such as their anniversary. The scale itself rises by the negotiated general increases each contract year. There is no performance rating in the calculation.

Clinical ladders

Levels such as RN I to RN IV that nurses advance through by meeting criteria like specialty certification, a degree, precepting or committee work. Advancement brings a higher rate or a differential. Ladders exist in union and non-union hospitals and work more like promotions than merit increases.

Hybrid systems

Some non-union hospitals place new hires by years of experience on a step-like grid, then use merit from there. Others keep merit for most employees but run steps for specific groups.

For budgeting, step systems swap the merit pool for two lines: the cost of everyone moving a step this year, and the cost of the negotiated scale increase. Both are known in advance from the contract and the headcount on each step. Compression shows up differently too: it happens when the first steps are raised to compete for new grads and the top steps aren't raised by as much.

Prorating merit for mid-year hires

Someone hired partway through the review period hasn't had a full year to perform. Employers handle this in a few ways:

• Prorate by months or days of service in the review period. The most common and easiest to explain.
• Eligibility cutoff: anyone hired after a set date (for example, the last quarter of the period) isn't eligible this cycle and is reviewed next year.
• Full merit regardless of start date, often when the hiring rate already reflected the current market.

Illustrative: a nurse hired with seven months left in the review period, rated for a 3.0% merit, gets 3.0% × 7 ÷ 12 = 1.75%. On $40.00/hr that is $0.70/hr, taking pay to $40.70/hr. Treat unpaid leaves of absence the same way if your policy excludes them from service time. The calculator has a months-eligible field that applies this formula.

Lump-sum awards for employees above range max

A range maximum is the most the organization intends to pay in base for the job. When a merit increase would push base pay past it, the usual practice is to raise base only to the maximum and pay the rest as a one-time lump sum. If pay is already at or above the maximum, the whole increase is paid as a lump sum.

Illustrative: a nurse at $51.00/hr in a $36.00 to $52.00 range gets a 4.0% merit. Uncapped, pay would be $53.04/hr. Base rises $1.00 to $52.00/hr ($2,080 a year), and the remaining $1.04/hr × 2,080 = $2,163.20 is paid once.

Lump sums keep base inside the structure and still reward performance, but they don't compound, so long-tenured high performers fall behind people lower in the range over time. If a lot of people in one job are at the maximum, the range is probably out of date. Benchmark it again rather than paying lump sums every year. Check your retirement plan and pay practices too: whether a lump sum counts as eligible pay for contributions or overtime depends on how those are written.

A merit cycle checklist

1. Benchmark first. Update ranges to the market before merit, so compa-ratios mean something. See compensation benchmarking.
2. Set the pools. Merit, market and compression, and promotion, each with its own budget.
3. Build and cost the matrix against your actual rating and position mix.
4. Apply rules for proration, lump sums and step-scale groups before managers see recommendations.
5. Review the results for compression and for unexplained gaps between groups doing the same work. See pay equity analysis.
6. Check individual cases with the merit increase calculator and the compa-ratio calculator.

Hospital comp teams that want role and metro pay data for the range-setting step can see how ClinicalRate supports that on the hospitals and facilities page, and how the data is built on the methodology page.

Frequently asked questions