HR Mavericks

Eddy’s HR Mavericks Encyclopedia


An employee approaches you about increasing their pay. Are you comfortable responding? This article will help you learn more about when to give raises, how much a raise should be, and what factors influence the decision. Preparation in the early stages of this process makes all the difference when the conversation arises.

What Is a Raise?

A raise is a permanent salary increase that a company can utilize to show appreciation to their employees. Raises are generally communicated via percentages (for instance, a 1% salary increase) and awarded based on pre-established criteria.

When Should You Give Raises?

Raises can be given for various reasons, but here are three situations to consider.

Increased Responsibility

Generally speaking, if a person has taken on additional responsibility, they should be compensated for it. They could be leading a team, working on more complex problems, or doing work that wasn’t part of the work they were hired to do. Having increased responsibility doesn’t always require a monetary increase, but you need to ensure that your employees are compensated fairly for the work they do.

High Performance

If you have an employee who consistently performs above expectations, your company can provide a raise to acknowledge their performance. This is also referred to as a merit increase. The challenge here is being fair. If you award raises based on performance, then you must be prepared to explain why employee A received a raise whereas employee B did not. Both company and employee expectations need to be addressed. If a person always goes above and beyond, will they receive a raise, or is it more situational than that? Being clear and upfront in the beginning can save you time and stress later on.

Retention Strategy

If your company experiences high turnover because of low compensation, you can increase wages to counter that. However, it is important that you consider multiple sources of information. You can perform a compensation analysis that compares the standard wage for a position in your specific industry. Identify the flexibility in your bottom line and keep your employees informed of progress. These changes won’t happen overnight, but people do stay in jobs if they know change is coming.

Cost of Living

Cost of living raises are salary adjustments given to help employees pay stay level with inflation increases. Companies can utilize a compensation analysis to find out what percentile that they are paying and how that relates to the current year’s inflation rate to decide if cost-of-living increases will be given. Cost of living also impacts raises and salaries due with respect to remote work. Your employees might be working in a completely different state than where your company's headquarter is based. A geographical pay study conducted in February 2021 found that half of 1000 employers based compensation on major cities near the employee. However, the organizations’ decision was influenced more by the talent and skills of the employee rather than the cost of living.

Scheduled Raises

Scheduled raises are a compensation trend that has been losing steam over the last decade as companies switched to a pay-for-performance model. Organizations do not want their employees to always expect a raise, but put in the extra work to deserve it.

What Factors Should Influence Whether or Not You Give an Employee a Raise?

When an employee comes around to ask for a raise, you want to make sure the process is fair. Here are some important factors to consider.

The Bottom Line

In a perfect world, everyone would get a raise when needed and appropriate, but the company’s financial resources dictate what is possible. If your company is experiencing a challenging year financially, don’t fret; there are other alternatives to raises. Consider a one-time bonus, changes in perks or benefits, and stretch opportunities to help meet career goals. These possibilities have a smaller impact on the bottom line than raises.

Industry Standards

Your competitors influence your decisions about raises because you can lose your employees to them. Employees do leave their jobs for minimal financial increase. As part of your compensation strategy, it is important to know if your organization pays less, the same, or more than the industry standard. Compensation analysis will help you compare your pay rates to the standard and adjust accordingly.

Established Criteria

You need to set the objectives that need to be met to qualify for a raise with your company leaders. Key performance indicators (KPI), going above and beyond, meeting department goals, or longevity are some examples. These criteria must be fair and legally defensible, so the more detailed your raise policy is, the easier it will be to apply. Let’s review a good and bad example of what this criteria looks like. Employee Awesome got a raise because they had met all their KPIs, this past year. These indicators included receiving a four out of five or higher rating on all client reviews, helping the business secure some additional revenue, and mentoring a junior employee for six months. If an auditor asked why this employee received the raise, you as an HR admin or your leaders could point to these specific examples. Employee Average received a significant raise of 10% because his or her manager really got along with them and didn’t want them to leave the team. This employee sometimes completed projects on time, but hadn’t mastered the basic skills of their job after being with the company for eight months. It would be difficult to explain to others why this employee got such a massive raise whereas others didn’t get a raise or a very small one. Your established criteria can be included in a compensation policy that is published in your employee handbook. This policy can provide general information about raises and then direct the employee to their manager if they have questions.

How to Decide How Big a Raise You Should Give

You’ve decided to give a raise to an individual, but are unsure how big it should be. Here are three things to consider.

Contributions of the Employee

The size of the raise can be influenced by how critical your employee is to accomplishing your company strategy. There are employees who have a specialized skill set that warrant a larger pay increase because it would be very difficult to find someone to replace them. Or perhaps that employee could be a potential successor of one of your leaders, and you want to ensure that they stick around.

Market Standard

If a compensation analysis reveals that you are significantly underpaying your employees, then it is time to make adjustments to get them up to standard. It doesn’t have to be accomplished in one day, but you can develop a timeline, get it approved, and possibly share that with your workforce.

Budget for Raises

Giving a raise to one or more employees decreases the pool of available money for other raises or projects. Raises can help ensure you have the talent to accomplish company goals, but there are times your hands will be tied by other initiatives. The most important thing to remember is that compensation is only part of why employees stay with your organization. Some may stay because they derive meaning from the company mission, others for the benefits, and some employees are solely hoping to gain experience. If you aren't able to provide raises, consider other ways to express appreciation and help employees further their careers.

How to Respond to an Employee Who Asks For a Raise

Responding to an employee who wants a raise can be a scary situation. However, it doesn’t have to be. Here are three things to consider before the conversation occurs.

Tip 1: Ask Questions

These conversations allow you to understand what motivates this specific employee. The more you understand what motivates him or her in asking for this raise, the more creativity you can bring to the situation. This conversation can help you identify if a bonus, more flexibility, or something else will help them feel valued, even if you can't give them a raise. It also allows you to better explain the position of the company to them.

Tip 2: Review Raise Criteria

One of the reasons for having specific criteria on how raises are given is to address this situation. Go over the criteria for granting raises in your company with the employee; they may have forgotten or been aware of them. Being clear and transparent with these policies promotes fairness.

Tip 3: Acknowledge and Take Time

It takes courage to ask for a raise, and it is important to acknowledge that. Thank them for making their request known, and ask for time to gather some more information to evaluate their request. This time enables you to talk with all the leaders involved in granting raises, identify whether the person is compensated fairly according to market and within the company, and review any other necessary policies.
Brent Watson

Brent Watson

Brent Watson enjoys problem solving, analyzing data, team building, and becoming an HR Guru. His work experience comes from the employee experience, recruiting, and training arenas. After attending a local HR conference, Brent knew that he had found his people and the problems he wanted to solve for in the business world.
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Frequently asked questions
Other Related Terms
Additional Pay
Cost of Living Adjustments (COLA)
Employee Payroll Taxes
Employee Reimbursement
Executive Exemption
Geographic Pay Differentials
Holiday Pay
Incentive Pay
Involuntary Deductions
Pay Adjustment
Pre-Tax Deductions
Professional Exemption
Relocation Bonus
Voluntary Deductions
Wage Garnishment
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