Who gets the raise? Splitting a fixed merit pool across your team

1. Before you start

A merit pool is the fixed pot of money a manager gets each year to raise the pay of a team — usually set as a small percentage of the team’s total salaries. It is fixed: whatever you hand one person, you cannot hand another. The decision is how to split it. A tiny example: a team is paid $200,000 in total and the pool is 3%, so you have $6,000 to divide across everyone. Give it out as a flat 3% and the person already paid the most gets the biggest cheque; concentrate it and you can actually move someone’s pay. That choice — flat or concentrated, and on what basis — is the whole subject.

Three honest statements before you start:

This is a Decide course. You read a situation, learn the idea, and make a call. You do not write or run any code.
The company below, Brightline Systems, and its people are composite — an invented firm built from ordinary figures so the reasoning is clean. No number is a claim about any real company or person.
This is not a certification. It shows, to you, that you can defend how you split a limited pool of raise money across a team.

You need only arithmetic and the nerve to give people different answers. The hard part is judgment.

2. The Situation

You manage a four-person team at Brightline Systems, and merit-review season has landed: you have one fixed pool of raise money — 3% of the team’s salaries — and four people who each expect a raise. One is a strong performer paid well below the market and quietly fielding recruiter calls; another coasts at “meets” but is already paid above market and will grumble loudest if their number is small. You have to split the pool and then sit across the desk from each of them and defend it.

The trap is the easy answer everyone reaches for — give everybody the same flat percentage. It feels fair, it hands the biggest cheque to the person who needs it least, leaves your at-risk star still underpaid, and rewards no one enough to notice.

3. What you’ll be able to do

After this course you will be able to:

Split a fixed merit pool across a team by weighing three things together — performance, where each person’s pay sits against the market, and who is actually at risk of leaving — instead of spreading it as a flat percentage.
Read a compa-ratio and say who a limited pool should move first, and why paying an already-above-market person more is usually the weakest use of the money.
Explain why the flat-percentage split is the failure mode — it rewards salary rather than performance and retains no one — and put a number on what it costs you.
Defend the split you chose, including the person who gets nothing, in language that survives the pay being visible to the whole team.

4. Prerequisites & time box

Prerequisites: arithmetic, and comfort reading a small table of salaries and ratings. Helpful but not required: the idea that every role has a market pay range with a midpoint. No spreadsheet needed. If the terms merit pool and compa-ratio are new, they are defined in section 6.

Time box: about 23 minutes of reading (measured), plus real thinking time on the call — this one rewards arguing the split back to yourself. That is under the 25-minute cap for a concept course.

Difficulty: 4 / 8 — a manager-level call. One fixed pool, four people, and three factors that pull against each other: performance, pay position, and flight risk. There is a wrong answer you can walk straight into (the flat split) and a person who should get nothing, which you then have to defend. A simpler version would hand you one at-risk person and ask yes-or-no; here you weigh the whole team and divide a fixed sum.

Free-tier honesty: no signups, no paid tools, no special hardware.

5. The case & where the numbers come from

Brightline Systems is a composite company: the four people, their salaries, ratings, and every figure attached to them are in-course assumptions chosen for clean reasoning, not drawn from or claimed about any real firm or employee. The ideas — the merit pool, compa-ratio, the cost of losing a strong performer, and internal pay equity — are standard compensation practice, cited in section 11. Every salary and dollar below is an assumption; every raise, compa-ratio, and forgone figure is computed from these inside the course, so you can reproduce each one.

The team competing for the pool. Every role sits in the same pay band, whose market midpoint is $100,000 (an in-course assumption):

Person	Salary	Compa-ratio	This year’s rating	Flight risk
Ava	$90,000	0.90	Exceeds	High — fielding recruiter calls
Ben	$110,000	1.10	Meets	Low
Cara	$95,000	0.95	Exceeds	Medium
Dan	$105,000	1.05	Below expectations	Low

Two more figures the review works with, both in-course assumptions:

Item	Figure
Team total salary	$400,000
Merit pool this cycle	3% of salary = $12,000

One figure is an assumption informed by the retention literature rather than invented freely: replacing a strong performer typically costs a large share of their annual salary once you count recruiting, lost output, and the months to ramp a replacement. The course uses half of salary as a round, conservative stand-in — about $45,000 to replace Ava — and flags it as an assumption, not a measured Brightline number.

6. The Concepts

The merit pool and the flat-raise trap

The merit pool is fixed: 3% of the team’s $400,000 in salary is $12,000, and that is all you have. The reflex is to spread it as a flat percentage — everyone gets 3%. It feels even-handed, so watch what it actually does. A flat 3% pays:

Ava (Exceeds, paid 10% below market, high flight risk): 3% of $90,000 = $2,700
Ben (Meets, paid 10% above market, staying put): 3% of $110,000 = $3,300
Cara (Exceeds, paid 5% below market): 3% of $95,000 = $2,850
Dan (Below expectations, paid above market): 3% of $105,000 = $3,150

The dollars sum to the $12,000 pool, but look at the order: the largest cheque goes to Ben, who merely meets and is already the best-paid, and the smallest to Ava, your at-risk star. A flat percentage rewards salary, not performance — the more you already earn, the more you get — so it pushes the already-overpaid further above market and leaves the underpaid star still underpaid. And the spread is so narrow ($2,700 to $3,300) that no one feels singled out for good work. That is the failure mode in one line: a flat split rewards no one enough to notice and retains no one who was thinking of leaving.

The alternative is to differentiate — concentrate the same $12,000 where it does work. The rest of this section is the three questions that decide where.

Compa-ratio: reading each person’s pay position

Before you can aim the pool you need to know where each person’s pay already sits. The tool is the compa-ratio: a person’s salary divided by the market midpoint for their role.

compa-ratio = salary ÷ market midpoint

At Brightline the midpoint is $100,000, so Ava’s $90,000 is a compa-ratio of 0.90 — she is paid 10% below the going rate. Ben’s $110,000 is 1.10 — 10% above. A compa-ratio near 1.0 means paid about right; below 1.0 means underpaid for the role; above means overpaid.

Why this decides where the pool goes: a fixed dollar of raise closes a real gap when it lands on someone below 1.0, and overpays further when it lands on someone already above 1.0. Spending the pool to lift Ben from 1.10 to 1.13 buys nothing — he was not underpaid and he was not leaving. The same dollars lifting Ava from 0.90 toward 1.0 fix an actual inequity and answer the reason she is taking recruiter calls. Pay position turns “who deserves a raise” into “where does a scarce dollar do the most” — and the honest answer is rarely the person already paid the most.

Flight risk and the cost of losing a strong performer

Performance and pay position tell you who should move; flight risk tells you who you cannot afford to lose while you decide. Flight risk is the realistic chance a person leaves in the next year — read from underpayment, market demand for their skills, and plain signals like fielding recruiter calls.

It matters because losing a strong performer is expensive. Take the course’s assumption that replacing Ava costs about half her salary — roughly $45,000 in recruiting, lost output, and ramp. Against that, a $6,000 raise that keeps her is cheap insurance: you spend $6,000 to avoid a likely $45,000 loss. That is the retention case in a number.

The judgment is that flight risk only earns the pool when it sits on someone worth keeping. Dan might also threaten to leave, but Dan is a below-expectations performer paid above market — paying to retain him keeps a problem and teaches the team that grumbling pays. Flight risk multiplies the value of retaining a strong performer; it is not a reason to fund a weak one. High risk on Ava is a five-alarm signal; the same risk on Dan is not the pool’s problem to solve.

Allocating the pool: where performance, pay, and risk line up

Now put the three together. The pool goes, in order, to the people where strong performance, a below-market compa-ratio, and real flight risk line up — and is withheld where they do not. Walk Brightline’s $12,000:

Ava — Exceeds, compa 0.90, high flight risk: every signal points here. Give her $6,000, lifting her to $96,000 (compa 0.96). It closes most of her gap and answers the recruiter calls.
Cara — Exceeds, compa 0.95, medium risk: strong and a little underpaid. Give her $4,000, lifting her to $99,000 (compa 0.99).
Ben — Meets, compa 1.10, low risk: solid, but already well paid and staying, so a merit raise here closes no gap. The $2,000 shown is a judgment call, not a merit decision — a small flat gesture some managers make so a steady performer does not read a bare $0 as neglect. It is equally defensible to give Ben $0 and move that $2,000 to Ava or Cara, where it closes a real gap; the merit logic leans that way. We keep the token in the split here only to make the trade-off visible.
Dan — Below expectations, compa 1.05, low risk: a merit raise now rewards under-performance. Give $0 this cycle and handle him through a performance conversation, not the pool.

That is $6,000 + $4,000 + $2,000 + $0 = $12,000 — the same pool, aimed. Compare the two splits: the flat 3% gave Ava $2,700 and left her at compa 0.927, still underpaid and still leaving; the aimed split gives her $6,000 to compa 0.96 and turns a likely $45,000 loss into a $6,000 spend. Same money, completely different result.

(An interactive calculator sits here — enter the pool, a star’s salary and market midpoint, and the targeted raise you are considering, and it returns the flat raise, the pay gap, and the compa-ratio each split lands on. Push the targeted raise up or down, or change the market midpoint, and watch the recommendation flip.)

Defending the split: the message a raise sends

A merit split is not just money; it is a message, and increasingly a public one — pay-transparency rules and simple team gossip mean people learn roughly what others got. So each number has to be defensible out loud, on performance and market, not just in your head.

That is what makes the flat split quietly corrosive: it says a raise is a function of tenure and existing salary, so the team learns that the way to earn more is to already earn more, and that a strong year and a weak one land in the same place. The aimed split says the opposite — a strong year, paid below market, moves your pay; a weak year does not. The hardest number to defend is Dan’s $0, and the defence is exactly the message: a below-expectations rating cannot carry a merit increase without telling the whole team the rating means nothing. You handle Dan honestly — a clear performance conversation and a path back — but not by quietly spending merit money to avoid the conversation. The split you can say out loud, including the zero, is the one that holds.

7. Your Call

You have seen how the merit pool, compa-ratio, flight risk, and the message a split sends decide Brightline’s four-way call. Now a different one lands on your desk.

Larkspur Hotels is a composite hospitality group, and you run the front-office team of four at one property — a different company in a different sector from Brightline’s software business. Every role sits in a band whose market midpoint is $50,000, and your merit pool is 3% of the team’s $200,000 in salary = $6,000. The team:

Person	Salary	Compa-ratio	Rating	Flight risk
Priya	$45,000	0.90	Exceeds	High
Sam	$55,000	1.10	Meets	Low
Tara	$48,000	0.96	Exceeds	Medium
Uma	$52,000	1.04	Below expectations	Low

There is a wrinkle Brightline did not have: Larkspur has just switched on pay transparency. Every raise will be visible to the whole team, so each one has to be defensible on performance and market — you cannot widen the gap between two same-role people without a reason you would say to their faces.

How this differs from the taught case (the transfer): this is a different company and sector (a hotel front office, not a software team), the figures are different so the arithmetic must be redone, and it adds a constraint the taught case lacked — pay is now transparent, so every number must survive being seen by the whole team. The concept under test is the same: split a fixed merit pool across a team by performance, pay position, and flight risk, and defend it.

8. Self-check

Before you write the memo, make sure you can say each of these in one line:

Why does a flat percentage hand the biggest raise to the person who needs it least, and who does it leave behind?
What does a compa-ratio tell you, and why does a fixed dollar do more on someone below 1.0 than above it?
Which person on your team should get nothing this cycle, and how do you defend that number out loud?

If any is fuzzy, reread section 6 — the flat-raise trap, compa-ratio, flight risk, aiming the pool, and the message a split sends are the whole course.

9. Stretch

Push the decision further on your own:

Back at Brightline: suppose the pool is cut to 2% ($8,000) instead of 3%. Does Ava still get $6,000, and if you hold her raise, whose share gives way? What does a smaller pool change about who gets nothing?
The genuinely hard one: Cara (Exceeds, compa 0.95) is now also fielding recruiter calls, so her flight risk jumps from medium to high — and the pool is still $12,000. Two high-risk strong performers, one fixed pot: how do you split between Ava and Cara, and what number would you need to know about each to decide?
Write the one sentence you would say to Ben when he sees, under pay transparency, that his raise was the smallest on a team where he is the best-paid.

10. Ship it — your decision memo

Write a one-page memo to your HR partner justifying the Larkspur split. State the call (for example: Priya $3,000, Tara $2,000, Sam $1,000, Uma $0, summing to the $6,000 pool). Show the reasoning in two or three lines (aim the pool where strong performance, a below-market compa-ratio, and real flight risk line up; withhold it from a below-expectations rating). Name what you rejected (the flat 3%, and any raise for Uma) and why. Name the one thing that would change your mind (a genuine change in a person’s rating, pay position, or flight risk). Keep it to a single page your HR partner grasps in two minutes, and write every number so it survives the whole team seeing it. This memo is your own argued claim — not a credential.

11. Sources

Brightline Systems and Larkspur Hotels, and every figure attached to them, are composite — constructed for clean teaching arithmetic, not drawn from or claimed about any real company or person. The ideas used to reason about them are standard compensation practice; references below.

Concept / claim	Source (publisher)	URL	Accessed
Merit pay and the merit-increase pool	Wikipedia — Merit pay	https://en.wikipedia.org/wiki/Merit_pay	2026-07-20
Compa-ratio = salary ÷ market midpoint	Wikipedia — Compa-ratio	https://en.wikipedia.org/wiki/Compa-ratio	2026-07-20
Pay range and its market midpoint	Wikipedia — Pay scale	https://en.wikipedia.org/wiki/Pay_scale	2026-07-20
Cost of losing a performer / retention	Wikipedia — Employee retention	https://en.wikipedia.org/wiki/Employee_retention	2026-07-20
Performance rating as the basis for merit pay	Wikipedia — Performance appraisal	https://en.wikipedia.org/wiki/Performance_appraisal	2026-07-20
Internal pay equity between same-role peers	Wikipedia — Equal pay for equal work	https://en.wikipedia.org/wiki/Equal_pay_for_equal_work	2026-07-20
Pay compression from an uneven split	Wikipedia — Wage compression	https://en.wikipedia.org/wiki/Wage_compression	2026-07-20
Brightline Systems & Larkspur Hotels companies and all figures	Composite — author-constructed for teaching (no external source)	https://en.wikipedia.org/wiki/Merit_pay	2026-07-20

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