O’Neill has impressed with the job he has done as Northern Ireland manager.
The 46-year-old guided Northern Ireland to Euro 2016, and then managed to get them out of the group - before they were eventually knocked out by Wales.
Forest, however, were never linked with O’Neill as they wanted to appoint a foreign boss.
Forest decided to pick Philippe Montanier to take them forward, but Merson feels that they have made the wrong choice.
He said: “Forest have just got a foreign manager. What’s the difference between him and Michael O’Neill? Why hasn’t Michael O’Neill got that job.”
Montanier’s managerial career to date has seen him taking charge of Valenciennes, Real Sociedad and Rennes.
The French boss has already overseen his first few training sessions at Forest, and he has also made his first signing at the Midlands club.
The Reds have signed Apostolos Vellios from Iraklis in Greece, as they bolster their forward line for the new campaign.