Salary Raise Rate & Base-Up · Base-Up vs. Merit Increase
Annual Pay Raise Rate and Base-Up
What is the salary raise rate?
- A raise has three parts: base-up, merit, and promotion
- A base-up is a permanent cost; a bonus ends with the year
- Announcing the average raise up front is where complaints start
Splitting the raise into parts changes one thing: the single number “this year’s percentage” becomes three decisions. Within the total labor cost budget, you set the base-up that keeps pace with prices and market wages, the merit increase allocated by performance rating, and the promotion increase for employees receiving a promotion. An average raise of 4% does not mean “everyone gets 4%”; it means the three components together equal 4% of the budget. Without this breakdown, each year’s negotiation becomes a tug-of-war over one overall raise rate.
Because a base-up applies to everyone, it largely reflects minimum wage increases and inflation, and at unionized companies it is a core item of collective bargaining. Merit increases are typically set with a raise-rate matrix crossing the appraisal grade with where current pay sits within the pay band. Even among employees with the same S grade, those at the top of the band get a lower rate and those at the bottom get a higher one, pulling pay toward the middle of the band. Under a seniority-step pay system, step increments are laid down first as automatic raises, so you need to look at base-up and step increments combined to see the real growth rate in labor cost for the budget to add up.
This structure matters to HR and training managers because they have to explain how appraisal results connect to pay. When the merit increase pool is small, the raise rates for S and B differ by less than one percentage point, and no matter how much appraisal training stresses differentiation, employees take it as “appraisals are just for show.” At the compensation design stage, you need to point out that for the differentiation to be felt in practice, the merit increase pool must not be smaller than the base-up.
Where things go wrong in practice is announcing the average raise first. Once “an average of 4% this year” is public, every employee expects 4%, and a B-rated employee who receives 3% feels their pay was cut. Another common misconception is explaining base-up and performance bonuses as if they were the same thing. A base-up goes into base pay and permanently raises the foundation for calculating ordinary wages and severance pay, whereas a bonus ends with that year. In low-wage job groups where the minimum wage increase effectively acts as a floor for the base-up, failing to check the latest minimum wage notice leads to a violation in the January payroll.
Kyungtae KimHR expert · Organizational culture and HR strategy consultant
Inwoo LeeLeadership, communication, and performance management expert“Base-up” comes from Japan’s annual spring wage negotiations (shunto, 春闘), where it meant raising the base pay level itself, as distinct from regular seniority step increases. As annual salary systems spread in Korea, it became a working term for the across-the-board raise. The matrix approach, which sets merit increases by performance rating and pay position, comes from the US-style merit increase model.
Consider a hypothetical case. Company A, a software company with 260 employees and KRW 90 billion (≈ US$67,335,000) in revenue, adjusts salaries every January. Last year it announced an “average 5% raise” in advance, and then about 90 employees rated B received 3.5%. The resulting complaints doubled first-half resignations from the previous year, and this October the CEO ordered the raise structure to be redesigned.
- The HR head split next year’s 4.5% increase in the labor cost budget into a 2% base-up, a 2% merit increase, and a 0.5% promotion increase, and agreed on the split with the finance head, who made it clear that “a base-up is a permanent cost, so we can’t go above 2%.”
- The merit increase was set using a 15-cell matrix crossing five appraisal grades with three positions in the pay band, widening the gap so that the lower end of the S-grade band gets 6% and the upper end of the B-grade band gets 0.5%.
- The training team ran a 2-hour program for 32 team leaders, who practiced one-on-one conversations explaining each person’s raise without using the phrase “average percentage.” One team leader summed it up: “So we’re supposed to explain why that number, not just the number.”
- The January notice now goes out as an individual written statement, with the base-up and merit increase on two separate lines. After checking the minimum wage announcement, we adjusted base pay for 7 junior-level employees first.
- After the adjustment, appeals fell from 41 the previous year to 9, and first-half voluntary resignations dropped from 22 to 11. The gap in average raise rates between S and B grades widened from 1.2 to 3.8 percentage points.