What is a pay raise?

A pay raise, or salary increase, is an employee’s annual salary adjustment. It’s usually given as a percentage of the worker’s base salary. The percentage increase might reflect their contributions, changes in the job market or shifts in the cost of living. For example, a physical therapist may get a 3% pay increase on their $45,000 salary, resulting in an increased salary of $46,350.

As an employer, you can use pay raises to reward hard work and stay competitive in most labor markets. A well-structured pay raise strategy can help employees feel valued and support your company’s recruiting and employee retention.

When should I give a pay raise to employees?

Employers often schedule raises annually, but the timing and frequency can depend on company policy and performance. Many employees expect their pay to keep up with inflation and may anticipate annual pay increases as a result.

You may offer employees pay raises for several situations:

• Recognizing an employee has reached an employment milestone with your company
• Negotiating a pay increase after an employee has requested a raise
• Offering annual pay increases to all workers due to inflation and the rising costs of living

Giving a salary increase can help encourage employees to remain with your company. Some employers may also explore employee perks such as commuter benefits that competitors may be unable to match.

Certain benefits, also called fringe benefits, may also have tax implications that provide an advantage over offering higher wages. For example, you may offer employees discounted stock options, which can also help them become more invested in your company’s success.

What was the average wage in 2025?

According to information from the Bureau of Labor Statistics, the annual mean wage for workers in 2025 depends largely on their age and experience level in the workforce. For example, adults between 20 and 24 years old make a median salary of $782 per week, while adults between 25 and 34 earn $1,139.

According to the data, businesses are often willing to pay a premium for workers who have more experience. Salaries can also vary by region and industry, reflecting differences in local market rates and cost of living.

The average annual raise percentage for employees in the US is 3.6%. state and local government workers averaged a 3.9% increase. However, some workers may opt to earn more by taking promotions or moving to new companies instead of accepting an annual salary increase. Consider how each raise impacts employees’ quality of life and their work performance.

What is the appropriate salary raise in 2025?

Companies may budget for a 3-5% annual pay raise, depending on the industry. To determine the appropriate wage increase for 2025, consider your company’s revenue. This can help you determine what level of pay raise you can give employees.

Factors influencing average yearly raise amounts

Average salary increases can vary depending on industry trends, location and economic conditions. Understanding the factors that determine pay raises, such as merit increases, cost of living adjustments and labor market pressures, helps your company make informed compensation decisions.

When you’re considering an appropriate raise amount for employees in 2025, you might evaluate these factors:

Revenue

Examine your company’s revenue compared to previous years. If your business is doing well and you notice regular growth, you might give employees a higher annual increase.

Cost of living

Cost-of-living adjustments (COLAs) are designed to offset inflation. They help ensure your company’s salaries keep up with rising costs.

The Social Security COLA for 2025 is 2.5%. For example, if you’re giving an employee an annual salary increase of $10,000, you can adjust that amount to $10,250 to account for inflation. Since the cost of living can vary across the country, check how costs and wages compare in your area when assessing pay raises.

Performance reviews

A significant pay raise can help motivate employees to work hard and stay loyal to the company. You can also link pay raises to your employees’ annual performance reviews with the help of Supervisors.

Merit-based increases recognize individual contributions and encourage other workers to perform to a higher standard. Tying performance reviews to salary increases can also help support fair pay.

Adjustments for equity

You might need to give employees bigger pay increases to maintain pay equity. For example, if an employee receives a pay increase for doing excellent work, they may make more than someone who has been with the company for a decade. Consider giving your long-standing loyal employee a raise can help prevent wage inequity and encourage job satisfaction among your staff.

Competitive pay

When determining pay increases, consider what your competitors are paying for similar roles. If you match or surpass wages offered by competitors, you may increase your chances of retaining top talent.

Calculating the new salary

When an employee receives a pay raise, it’s important to accurately calculate the new salary to reflect the percentage increase.

The most common method is to apply the raise percentage to the employee’s current salary. For example, if an employee’s current salary is $50,000, and they receive a 10% pay raise, their new salary will be $55,000.

The formula is: New Salary = Current Salary + (Current Salary x Raise Percentage).

Consider the impact of the raise on total compensation, which may include benefits, bonuses and other forms of pay, such as commission. When determining final take-home pay, you can factor in deductions, such as taxes and benefits. Employees can use online salary calculators or consult a financial advisor to understand how a pay raise may affect their compensation package.

By carefully determining the new salary, you and your employees can ensure pay increases are fair, transparent and aligned with company goals.

Why some employees are interested in more than a salary raise

Most employees appreciate a cost-of-living raise at a minimum, and many are thrilled with a significant pay raise that recognizes their hard work. However, when offering an employee a pay increase, you may encounter workers who want to negotiate for better compensation in other areas.

For example, some workers may request that, in lieu of a pay raise, they receive more paid time off (PTO) to travel. Other employees may request a paid or discounted gym membership as part of their benefits package to improve their health.

Employees who have developed new skills may also negotiate for additional compensation or benefits to reflect their increased value to your organization.

The effect of job switching

As you choose a pay raise percentage, consider how job switching might affect your business. While annual raises at the same company may fall within a narrow percentage range, changing employment can result in a higher salary raise percentage. For example, employees may receive a 3% increase on their current salary, but they may negotiate up to a 20% increase with a new employer.

If job switching affects your workforce, consider higher pay raises or additional benefits. While you may be unable to match potential salary increases at a new company, you can show employees you value their work, such as additional benefits or an employee recognition program.

Is giving a pay raise necessary?

You aren’t required to give your employees annual pay raises, and you may have valid reasons for choosing not to do so. For example, you may be cautious about raising salaries if you manage a startup.

If you choose not to give employees a pay raise, you can share with them why you’ve chosen not to. Clearly communicating your plans for pay raises or future compensation adjustments can maintain trust and help employees stay connected to the business.

Pay raises are a top priority for employees managing rising costs. To boost employee retention, choosing your raise percentages based on company revenue, market conditions and competition is important. By offering competitive pay raises, you can create an environment where employees feel valued, motivated and committed to the company’s long-term success.