Important Factors That You Should Consider When Making Pay Raise Decisions

The holidays are fast approaching and it is the season of giving. However, the decision on giving an employee a pay raise rather than a gift are both completely different topics.

Ideally, the annual salary increase budget should adequately reflect the contribution, success and value of each and every employee for the past year, in every company. However, more often than not, Leaders find themselves with a salary increase budget that does not stretch as far as they would ultimately like.

Realistically, difficult decisions need to be made about which employees to offer pay raises to. Deciding who will receive a salary increase, and the value of each individual raise, requires a well considered and fair evaluation, using set standards that you apply equally to each employee. In this article, we will give you some advice together with some insights from outstanding young entrepreneurs on what to consider when giving your employees a raise.

1. Consider each employee’s individual performance

“My company is all about not just completing tasks, but contributing toward a whole when it comes to client projects. Deserving employees can look ahead, plan and deliver accordingly on a monthly basis rather than letting daily deadlines affect their output. I look not only at performance, but also at behavior and strategies. The right attitude can make all the difference during time crunches.” ~ Duran Inci, Optimum7

2. Weigh your employees’ responsibilities

“I like to give raises to team members who take on extra responsibility or show interest in other projects. Since we are a small business, responsibilities can expand or change quickly, so I appreciate it when someone does take on new or extra tasks. When they do, I compensate them accordingly.” ~ Kristin Kimberly Marquet, Marquet Media, LLC

3. Understand typical market rates for each employee’s role

“A team member’s pay is determined by the market rate and the scope of work. If the market has adjusted, the business owner has no option but to go with the market or risk losing that employee. If the scope of work has increased, either by volume or by skill sets, then a pay adjustment should happen accordingly.” ~ Michael Hsu, DeepSky

4. Evaluate your employees’ skills

“Consider the employee’s value and how ‘irreplaceable’ they are. That’s the No. 1 factor for me. Replacing a key employee is no easy task. How difficult it is to replace the person should help you determine what type and how many incentives you are willing to offer.” ~ Shu Saito, All Filters

5. Length of service

“In my opinion, employees who have worked with my company for a long time deserve to see a return on their time investment. And while it’s nice to try and reflect the revenue they generate in their pay, it’s not always obvious what impact their work may have on our bottom line. Instead, I stick to rewarding those who spend the most time with us and demonstrate the most enthusiasm for their duties.” ~ Bryce Welker, Beat The CPA

6. Level of Investment from the Employee

“Employees who are invested in the business often come up with ideas to improve workflows and customer experience. Such employees are going above and beyond their tasks and make a real difference to the company. Contributions toward improving the company overall are critical factors to consider when offering a raise. You want to keep such employees on and reward them too.” ~ Syed Balkhi, WPBeginner

Consider non-financial rewards

Raises are just one way to show your employees that you appreciate their hard work; therefore, clarify from the outset what types of compensation you are able to offer.

For Reference:

Pay increase (raise): Usually a set percentage based on the employee’s pay, raises result in a permanent increase in payroll expenses.
Bonus: A variable cost (one-time payment) tied to sales or production volumes, for example.
Benefits: Flex hours, a travel stipend or tuition reimbursement are examples of incentives that can be easier on your bottom line while still showing employees you’re invested in their success.

Source: US Chamber of Commerce

To say the least, a salary increase may not be what your employee needs. More flexibility, career progression, training, mental health and wellness initiatives and additional annual leave are some of the non monetary rewards you can give to your valuable employees.

Factors you should not consider (or try to innovate away from)

Solely Rely on Seniority

Employees’ salaries often increase with seniority for various reasons. Senior employees typically offer a high level of specialty knowledge, commercial acumen, experience and leadership talent.

However, none of these attributes are inherent characteristics of seniority. So, when reviewing the salary of a senior employee, evaluate whether their seniority is indicative of breadth of experience, commercial acumen, specialist knowledge, leadership credentials, strong relationships and networks, industry insight, and other qualities.

Likewise, some mid-level staff may be especially deserving of salary increases. Don’t underestimate their capabilities in areas senior staff are normally recognised for.

Remember, seniority can inform your hierarchy of salaries, but it shouldn’t automatically mean salary increase entitlement, particularly if an employee’s results and value aren’t amounting to those ordinarily associated with seniority.

Fixed schedule of giving a pay raise

Conventional wisdom suggests that the best time for pay raises comes during performance reviews or at the end of the year. However, tying raises to performance reviews may cause employees to only do their best near promotion season.

Here is a quote from the management of  Tech Company Xero from New Zealand:

“Consider moving away from annual salary reviews. They encourage staff to work harder in the months leading up to the review. A better option might be on-the-spot raises. Not only does it keep your staff on their toes, it gives them immediate feedback for a job well done.”

In summary:

People may love their work but at the end of the day, they work with the goal of financial security. Regular pay raises can show employees how much you appreciate their hard work and can also prevent them from feeling dissatisfied in their current environment. However, it’s important to know when a raise will be the most effective and well-earned.