The importance of giving and effectively communicating employee pay raises when due cannot be overstated. From improving long-term retention and employee loyalty to boosting staff engagement and morale, employee raises are key to ensuring that your team is properly recognized and compensated for their hard work.
This article will take a deep dive into employee raises and offer insights into how, why, and when to give them. We’ll close things out with some guidance on how to request and communicate a raise for your employees.
Reasons to give employee raises
There are several reasons to give employee raises. The key is to ensure that managers are aware of key factors in determining salary increases, and are able to identify and recommend instances where they are warranted.
To help, here are some of the most common reasons to give employee raises:
- Value creation. When an employee exceeds expectations, takes on new work, and creates their own high-value niche within your organization. These are employees who regularly go above and beyond, and look for ways to grow the business.
- Length of service. If employees have been with your company for extended periods of time, they typically get periodic pay increases. Pay increases are often given at milestones like 5, 10, and 20 years.
- Reliability. Employees who complete tasks consistently, on-time, and with a great deal of success are often shortlisted for pay increases. Think about those employees who are critical for day-to-day operations.
- Confidence. Employees who are confident enough to ask for a raise, and back it up with a clear business rationale for why it will benefit the business. This will often involve a growth or employee development plan to upskill the employee to the next stage in their career.
- Team results. Some companies will consider team-wide pay increases in the event that a specific team - or the entire company - is performing above expectations. This is a great way to re-distribute success and show appreciation for accomplishments.
- Retention. Sometimes, employee raises are given to ensure that employees are happy where they are, and won’t want to leave. Or, in some instances, as a tool to outbid an outside job offer that threatens to steal a high-value employee.
- Market demands. The going rate for in-demand positions is likely to shift at semi-regular intervals. It’s important to stay on top of what the typical salary is for your mission-critical positions and ensure that you’re meeting those standards at a minimum. This will help prevent employee poaching or team members from moving to greener pastures.
- Inflation or cost-of-living. Many companies offer annual or bi-annual, company-wide, pay increases to account for increased inflation and cost-of-living in their areas of operation. These raises are driven by economic factors, and help employees maintain their quality of life and buying power.
One question that will likely arise is around part-time workers. Do part-time employees get raises? If so, how do you determine when to give them one?
Our answer to that is: it depends on the nature of the part time work. What type of work does the person do? Is it critical to your business? How does their performance compare to your expectations?
In general, if any of the above factors are relevant to a part-time employee on a consistent basis, then they likely deserve a pay increase. Your focus when determining pay raises for part-time workers should be on output, not input.
The manager and HR team are responsible for identifying one or more of these key factors in determining salary increases and lobbying on behalf of the employee. Once a reason to give an employee raise has been identified, the next step is to decide on what type is warranted.
Types of raises
There are four key types of raises that you should consider for your employees:
- Performance and merit increases
- Standardized increases
- Base wages
- Cost-of-living increases
Let’s take a look at each in more depth.
Performance and merit increases are what most people think of when they hear “raise” or “promotion”. These are employee raises that are given based on the attainment of goals or achievement of target results in the previous year. Performance and merit increases can be a standard percentage increase, or a lump sum added to the employee’s annual salary or hourly wage. They are usually tied closely with a performance appraisal and goal setting activity that creates a “carrot and stick” situation wherein employee contributions and effort are driven by monetary reward.
Standardized increases are pay raises that are given across the board for a team or company. All salaries are increased by the same amount, which is either calculated as a percentage or lump sum. This type of pay increase ensures that all employees receive a raise, but it fails to single out and recognize the high (or under) performers. While standardized pay increases help to improve quality of life for all employees, they can ultimately harm morale for top performance by failing to incentivize them to go the extra mile. It can also create a sense of entitlement, and expectation, that raises will come, regardless of effort.
Base wages, or salary bands, are a great way to ensure that your company compensation package stays competitive within your industry. This requires that you stay on top of trends in your industry, market, locations of operation, and for specific job titles to ensure that your pay is competitive. To implement base wages, companies will determine what a low-medium-and high salary looks like for a specific role, and then determine what percentile they want to be in relative to the industry. Employee salaries will then be slotted into those salary bands. This approach works well if you take steps to avoid “wage compression”. That is, when new hires are given higher salaries than long serving employees due to market changes.
Cost-of-living increases, as mentioned above, are annual or bi-annual raises that are given to keep up with inflation or increases in daily expenses. These are typically given at a rate of around 2% to keep up with economic factors.
How to calculate a pay raise
The most common way to calculate a pay raise is by a specific percentage of an employee’s salary. Standard employee raises hover around 3-4% per year, depending on the industry and the employee in question. That percentage may be lower - for example, if you’re just giving a cost-of-living increase - or higher - for example, for high performing employees who have gone well above and beyond expectations. To determine the percentage increase you want to give, the employee’s manager and HR team should meet to determine what is fair and reflective of the employee’s contributions while also taking into account company budget.
Once a percentage point has been decided, it’s a matter of applying some simple math to calculate the pay raise.
The formula to calculate a percentage-based raise is:
(Current Salary) x (Percentage Increase) = (Pay Increase)
To make this formula work, you first need to convert your percentage point into a decimal. As a reminder, here’s how a few common percentage points converted to decimals:
- 1% = 0.01
- 5% = 0.05
- 10% = 0.1
So, if your high-performing employee currently makes $75,000, and you want to give them a nice 8% raise, the formula would be:
(75,000) x (0.08) = ($6000)
That employee’s new base salary would then be $81,000.
How to request a raise for an employee
As mentioned throughout this article, the manager plays a critical role in advocating for an employee, and making the case for why they deserve a raise. It’s important, therefore, that managers know how to request a raise for an employee.
Here are some key steps that managers should be aware of when requesting an employee raise:
- Review the company policies and procedures around reviews, compensation and promotions. Make sure that you’re clear on all requirements throughout this process, and ensure that you have all information and documentation that will be required.
- Prepare your case ahead of time. Give yourself two or three weeks before the formal process begins, and ensure that you get your requests in well before budgets are finalized for the year.
- Conduct employee evaluations. Review each employee’s performance and growth from the previous year, and map that back to the individual and team goals that you were looking to hit. Did they meet their targets? Exceed them? If so, document these accomplishments and present them as part of your case. Be sure to also take the employee’s self-evaluation into consideration, and include their points in your request as well.
- Review your employee’s existing salaries and benchmark that against market averages. Use free tools like Glassdoor and Payscale to get a handle on where your employees’ salaries lie compared to the average. If it’s lower, this is good information to include in your request.
- Set expectations with your team. Meet with them to discuss the raise process, and let them know what you are doing to advocate for them. Be realistic about the likelihood of getting a raise, and what the raise amount might be.
- Prepare your request letter. When creating a letter to request a raise for an employee, you should include the following:
- The name and role of the employee
- What they currently make
- Your suggested salary
- Why the person should be given a raise
- Key accomplishments and contributions to the team
- Concerns about the implications of not giving this person a raise
- Any additional information that might help “sell” the review board
- A request for a specific time frame for a decision
- Keep your employees in the loop. Tell your employee when the request has been sent, and give them a rough time frame for when they can expect a reply. Communicate the results of the request as soon as you receive and review them.
- Know what to do if an employee raise request is rejected. If your raise request is rejected, the next step is to relay that information to the employee. Inform them of the decision, and empathize with them. They’ll likely be disappointed. Take a forward-looking mentality from this conversation, and work with the employee to create a plan that will ensure they get a raise next year.
If your employee raise request was accepted, then great! That’s where the fun begins: telling your employee that they’ve earned a pay increase.
Communicating salary increases to employees
Telling your employee about a salary increase is usually first done via in-person meeting or phone call, followed by a formal employee raise letter.
Have a call or meeting with the employee to share the good news. Be sure to:
- Tell them that the raise has been approved
- Reiterate what their old salary was, and what their new one will be
- Explain the rationale behind the amount
- Summarize what led to the raise
- Thank them for their contributions and accomplishments
- Congratulate them
After you’ve had this call, follow it up with a formal employee raise letter. This letter should be delivered via email, and include:
- A short paragraph thanking the person for their contributions
- A table outlining the employee’s old and new salary
- The date that the raise will go into effect
- A thank you and formal sign off from the manager, department head, and HR leader
If the employee raise has been coupled with a promotion or upgrade in the title, then you might also want to include a more public announcement to the rest of your team. Send a company- or team-wide email that announces the promotion, and congratulates the employee on their accomplishments.
You may have noticed that we’ve emphasized why the individual received the raise as a key component of communicating salary increases to employees. This is an exercise in reinforcing specific behaviors and outcomes that you hope to encourage in that employee, and those around them. By clearly outlining what led to the raise, the hope is that others will take notice and bring their own efforts in line with this high-performing individual.