Let’s talk pay raises.
The conversation can sometimes be uncomfortable or messy, and (worst-case scenario) they could cause employees to argue, strike, or quit. That’s because there aren’t any strict rules surrounding how to give (or not give) raises. We do, however, have averages, statistics, and lots of information that can guide you in deciding how much and when to give- and what to do if you’re not ready to commit to a pay raise.
If you approach the issue with some knowledge, your team’s way more likely to leave your office happy.
At the moment, pay raises are a big issue for employers according to PayScale’s 2019 Compensation Best Practices Report. That’s always been the case, but it’s a really big deal now because the job market is in such great shape. Not to mention, employees can switch companies with less effort if they feel their monetary needs aren’t being met. When you’re working against a healthy job market and high turnover, one very attractive way to retain employees (and to snag a few new ones) is to offer significant annual pay raises- on top of a generous compensation package, of course. In other words, money talks.
Still, despite the growing concern about retention and the strong job market, the average pay raise is expected to remain at three percent or less, according to the study. 73 percent of companies have a pay plan in place already, with individual incentive bonuses becoming very popular. 66 percent of those organizations have added that within the last two years. In 2018, 27 percent of employers gave their workers a three percent raise, while 16 percent of employers just gave 2 to 2.5 percent. Then there was the 10 percent of employers who offered 20 to 30 percent, a significant jump.
Look at salary guides to see if your offered salary ranges are on point with comparable companies. When researching other salaries and companies, keep in mind the cost of living in your area, the size of your company, and your industry. If you’re significantly lower than other organizations, you may want to give raises stat. What we’re seeing is that there’s a huge range, with sales, service, and leisure/ hospitality services traditionally landing on the higher end of the spectrum. According to The Bureau of Labor Statistics, those who have the lowest wage growth are in education, insurance, construction, real estate, and hospitals.
Preparing to give raises
You’ve done your research and you’re in the middle of the road for your industry. What’s the harm in cranking up the water pressure a little bit?
You have to make sure that’s feasible. While you may want to offer raises to all of your people, you’ll have to analyze your budget to see how much can be moved toward salaries. You may consider creating an extra budget line for retention bonuses, employee recognition gifts, and merit awards.
From there, create performance evaluations. Look at each person’s job description and compare that with his or her current responsibilities. Is he taking on more work? Is she keeping up? Have they taken on more work since your previous review? The answers to these questions will inform whether or not your workers are ready for a raise.
The two kinds of raises to consider: uniform or merit-based
As you’ve gathered, there are a ton of things to consider when it comes to giving raises- including what kind to give in the first place! There are two types. The first is called a uniform raise, which means at a given time every year everybody in your company receives a bonus. The other is merit-based, which revolves around, well, employee merit.
You’re less likely to arrive at conflicts if you stick with standard, uniform raises across the board. There will be no comparison, no arguments, and no one coming into your office requesting a personal raise. That one sounds like the best choice, and if you’re just trying to avoid arguing and general discontent, the short answer is that it is. But uniform raises can actually hurt morale.
Every organization (yours too) has those super-motivated work machines who are outstanding, going above and beyond the call of duty, and deserve to be rewarded financially for their efforts. So would it be fair to treat them exactly the same as everybody else when you’re thinking about raises? That’s a key question you need to consider for your company.
Another question to answer is this: would performance-based raises help satisfy your employees while keeping morale high? In order to do these, you’d need to meet with each employee every six months (or annually, if you feel that’s enough) in order to discuss performance and offer feedback. In other words, a performance appraisal. Create goals for each employee. If they meet the goals or go beyond them, they could be rewarded with a pay raise.
While this method probably seems like the most fair option to everybody involved, keep in mind that you may be creating friction and competition between employees trying to get ahead in your company. Now an additional incentive for competing says they can score the coveted high raises. If you’re looking to create a culture where everyone works together on projects, where everyone is supportive- this may weaken that culture.
There’s no perfect solution, so what do your workers think?
It’s all about communication
It’s key that your company create a pay raise philosophy, and outline this for your employees so there’s no confusion. According to a 2020 study by World at Work, just 13 percent of employees understand how salary, benefits, and variable pay work together. And about a third of respondents said that while they understood the thought that went into their raises, 45 percent said they didn’t understand it. Make sure you’re answering the following questions clearly and thoroughly:
Do you give an annual 3 percent raise to everyone? Or is this raise tied to economic factors so it can vary from year to year? Is it based on performance – and if so, are there specific goals that each employee must meet in order to receive a specific pay raise? How often are raises offered?
When you do give a raise, make sure you explain why the person is receiving it. Talk about their contributions that led to the raise they earned that year. Show your appreciation for the work, and offer more ways they can work to receive raises in the future. When you’re done with the meeting, add a written document to his or her file detailing everything that was discussed, and send it to the employee.
It’s really important during this meeting that you’re not comparing the employee’s raise to anyone else’s, or their performance to others. Why? Theirs may have been comparatively smaller.
When your employee is dissatisfied
This will happen, and they may have expected a larger raise (or a raise in general, if you weren’t prepared to offer one).
It’s important to stay objective throughout the meeting. Listen to what they have to say, and stay calm. Wait for your worker to finish presenting their reasons for why they believe they deserve a higher pay raise (or a raise in general). When they’re done, you can calmly explain how you determined how to award raises. Explain your personal evaluation process, along with your company’s corporate one. It should be simple math: What your company expects, added to what your employees do, will determine the raise they get.
But perhaps this person does deserve something more than a pat on the back, although you may not want to offer a raise at this time. There might be something (other than money) you can offer. Maybe a few days vacation or flextime? It could be a lunch in their honor, in order to recognize them for the hard work they’ve been doing. Think of something beyond the pay raise that shows your employee how valuable he is to the company.
It’s all about raising the bar. Or in this case, raising the pay.