Employee Raises: How to Decide How Much to Give

A key part of attracting and keeping the best employees involves reviewing the compensation you are paying present employees and awarding raises as your business and the market demand. As inflation climbs, so too do your employees’ expectations. A whopping 92% of employees expect a more than 6% pay increase this year. And if employees don’t get a raise, 27% are prepared to look for a new job and 31% are ready to bring the raise convo up again.

You might think about giving pay raises to retain your best workers and keep up with the 8.5% annual inflation rate. Learn the requirements for raises, when to grant pay raises, and the formula for raising salaries.

Considerations for salary increase

Most employers develop a list of salary increment requirements before awarding raises to employees to establish a common foundation for pay increases. This enables you to choose between various pay raise options.

One or more of the following factors may determine the basis for your salary increase.

Cost of living

When prices for goods and services rise due to inflation, money loses value and living expenses rise. Since living expenses are constantly changing, so should the wages you pay your employees.

To help your employees keep up with increases in the cost of living, you might give them a raise. Regardless of performance, the majority of your team has received a cost of living raise.

You can check with the Social Security Administration to find out how much something costs to live. In order to keep up with the economy, Social Security benefits are increased through the cost of living adjustment (COLA). The COLA is 5.9% for 2022, which is the highest increase in 40 years. It would be equal to this annual cost of living increase to offer a 5.9% raise.

Merit-based raises

You might also grant merit-based pay raises. Perhaps one of your employees added new responsibilities, a new skill, or a new title. For instance, you might raise an employee’s pay if they pass the CPA exam.

Raising pay based on merit may not be common. If you do decide to give raises to everyone on your staff, the amounts may vary depending on performance. Calculate raises based on merit with care. Find out which employees contributed the most, went above and beyond the call of duty, and best met the objectives of your company. Keep thorough records to support your choices.

Encouragement of other employees to perform better is a benefit of merit-based raises. if a worker isn’t given a raise, they might wonder how they can improve their work.

Length of service

Have employees who recently joined the company been paid the same as those who have worked there for years, but due to inflation, the long-term employees’ salaries have not kept up with starting salaries today? If this is the case, your company may be experiencing pay compression, a problem that is common in today’s business environment.

If senior employees find out that newcomers make as much as they do, you’ll have problems with morale. Clearly, the only way around this problem is to make sure that long-term employees are paid more than newly-hired employees. If market conditions require that you give new employees more pay, you’ll have to give older employees at least a little more as well.

You might give a raise to employees who reach milestones, like being with your company for five years. This shows employees you value their service and want to keep them around for years to come.

Retention

Raising salaries is another way to stop turnover. Your company may suffer as a result of turnover. It might cost you money and time. Additionally, it may result in a decline in employee morale. Make every effort to keep turnover from having an adverse effect on your company.

Although giving raises won’t always stop turnover, many businesses still employ this strategy.

Many employees leave their jobs for financial reasons (40 percent of those surveyed said they left for a company that offered them a 10% raise or more), while others do so for personal reasons or to look for new career opportunities. You should hold regular employee performance reviews and meetings in order to identify whether financial issues are the cause of a disengaged employee or one who is looking for other employment. Analyze whether giving a raise makes the difference between keeping top talent and losing them.

How much should a raise be?

It can be challenging to decide how much to raise an employee’s pay. Utilize data to aid in decision-making.

For employees who surpass their objectives and their employer’s expectations, the average raise percentage at the national level is 3%. And a study found that 56.4% of employers intend to give employees a 3% pay raise. A 3% pay raise, however, might not feel like a raise due to high inflation and employee expectations.

To help you determine employee raise amounts, consider the following statistics:

— Cost of living adjustment (COLA) is 9% for 2022

— Consumer price index (CPI) rose 5% year-over-year in March 2022

— 92% of employeesexpect pay increases of greater than 6%

— 40% expect more than 6%

— 31% expect more than 8%

— 21% expect more than 10%

You might decide to give employees more or less than these percentages, depending on factors like location, merit, and what you can afford.

Location: Where is your company’s location? How about your staff? Think about how the average cost of living in any selected place may affect raise amounts.

Merit: What kind of value do your employees bring to your company? What is the ROI of their investment? To compare the amount of revenue an employee generates to the amount of money you spend on their compensation, use human capital metrics.

What you can afford: Your business will also affect how much of a raise you give. In the event of high profits, you might choose to donate more. Hold off on giving raises to employees if you are having trouble covering your business expenses.

How often should an employee get a raise?

The frequency in which you give employees raises can also vary. Some businesses choose to schedule annual or semiannual raises. Others give raises based on when employees earn them. Other businesses wait until employees have been with the company for a certain amount of time before offering a raise.

Again, make sure you consider your business’s profits before giving frequent raises.

Bottom Line

Raises aren’t the be-all and end-all for workers. Many employees value other types of benefits, including: Work-from-home opportunities , Flexible schedules, Paid time off.

SWHR has been helping companies to build their teams and values for over 10 years. Contact us to find out more about our unique services and see how our expertise can benefit you.