Introduction to Fair Compensation

Fair compensation is the foundation of a positive workplace and a key driver of employee satisfaction and retention. It means providing a salary or wage that accurately reflects an employee’s skills, experience, and the value they bring to the organization. Ensuring fair compensation is not just about meeting legal requirements—it’s about fostering employee morale, motivation, and loyalty.

Employers should regularly review market rates, cost of living, and employee performance to ensure their pay structures remain competitive and equitable. Utilizing a pay raise calculator can help organizations determine appropriate salary increases and maintain fairness across the board. By prioritizing fair compensation, companies show their commitment to employee well-being, which in turn supports higher employee satisfaction and a more engaged workforce.

Determining the Need for a Pay Raise

Assessing whether an employee deserves a pay raise involves a careful evaluation of several important factors. Employers should consider the individual’s annual salary, recent performance, and contributions to the company, as well as the organization’s overall performance and financial health. External factors such as cost of living increases, industry standards, and employee satisfaction also play a crucial role in these decisions.

A pay raise percentage can be determined by benchmarking against similar roles in the industry and factoring in the company’s ability to support salary hikes. Tools like a salary hike calculator can help employers quickly estimate the new annual salary based on different raise percentages. Merit based raises are especially effective for recognizing top performers and encouraging continued excellence. By regularly reviewing employee performance and staying attuned to market trends, employers can ensure their salary increases are both fair and competitive, supporting employee retention and satisfaction.

Deciding the criteria for a raise increase

Salary increases can be awarded for many reasons. Having a clear and transparent policy on who receives an increase, how often and how much to award can help avoid confusion, frustration and accusations of favoritism among employees. Using a structured approach to determining salary increases helps ensure fairness and transparency in the process.

Some criteria to consider include:

• Evaluation of the employee’s performance as a key factor in determining the raise.
• Aligning compensation decisions with the company’s goals to support organizational success.
• Other factors, such as market trends, budget constraints, or financial outlook, should also be considered.

Merit-based increases

Merit-based increases are often awarded following a performance review, tying pay increases to positive performance reviews can help motivate employees and ensure top performers are properly rewarded for their efforts. A merit-based increase may be a small amount in addition to any cost-of-living raise offered to all employees who meet the eligibility requirements.

Time-based increases

Time-based pay increases may help you reduce job-hopping and retain your most long-standing workers. They’re often written into employment contracts and state that employees who’ve been with the company for a specific period of time and meet certain performance requirements receive a percentage to thank them for their loyalty. For example, an employee who stays for five years may receive a certain percentage in addition to any standard cost-of-living increase.

Cost-of-living increases

Cost-of-living increases may be awarded to employees on a one-time basis to cover unusual circumstances, or on a set schedule. Living raises are designed to help employees keep pace with inflation and rising costs. The increase could match the percentage used for Social Security adjustments, or be based on the U.S. Consumer Price Index.

Pay band evaluations

Consider running regular pay reviews to ensure everyone on your team is being paid fairly. It’s common for those who stay in jobs for a long time to see their pay rise more slowly than those who job hop, because job hoppers can have more opportunities to negotiate new salaries. A senior employee who’s doing good work but is at the top of their pay band may have limited opportunities to receive increases.

Evaluate each employee’s pay individually, and consider revising pay bands if necessary to ensure fair compensation for all. In addition to salary, benefits packages should also be reviewed regularly to ensure your overall compensation remains competitive and supports employee satisfaction and retention.

Related: 2023 Hiring Trends: The State of the Great Resignation

If you decide to offer a wage increase to an employee, the most common options are:

• A flat wage increase
• A percentage increase

Merit-based raises not only reward employees who have taken on new responsibilities or exceeded expectations, but can also motivate other employees to improve their performance.

How to calculate flat wage increases

Flat wage increases are often included in contracts for new employees. For example, you might advertise a job with a starting salary (old salary) of $35,000, increasing to $40,000 after one year. The old salary serves as the baseline for determining the new pay. Once that period is up, any future raises may be performance based, or cost-of-living increases.

If you award an employee a flat raise, you’ll need to determine how much additional money it works out to each week or month. The current wage is used as the starting point for calculating the raise amount. You can do this by taking the employee’s new gross wage, and dividing it by the number of pay periods they have in a year. For example, for an employee who’s paid monthly:

• Old Pay (current wage):  $35,000 / 12 = $2,916.66
• New Pay: $40,000 / 12 = $3,333.33
• Raise Amount: $3,333.33 – $2,916.66 = $416.67

After the increase, the employee will receive $416.67 per month more in gross pay. This additional money reflects the increase in their earnings each pay period.

How to calculate raise percentages for your employees

The percentage method is a common way to calculate salary increases. To determine an employee’s raise, you can use the following formula, which is applicable for both annual salary increases and other types of pay raises or salary raises. The same formula and same steps can be used for different raise scenarios:

• New Salary = Employee’s Salary × (1 + Raise Percentage Increase in decimal form)

For example, if you want to calculate a salary raise for an employee who’s currently receiving $40,000 per year and you decide to give them an 8% percentage raise, first convert the salary increase percentage to decimal form by dividing by 100 (8% becomes 0.08). Then, apply the formula:

• New Salary = 40,000 × (1 + 0.08) = 40,000 × 1.08 = 43,200

The employee’s raise is $3,200 per year, which is the result of applying the employee’s raise percentage to the employee’s salary. This method for calculating pay raises and salary raises ensures consistency and fairness, and can be used for any raise percentage increase.

Keep in mind, the raise amount will also affect the employee’s net pay after taxes and deductions. Companies often increase salaries periodically to remain competitive and retain employees.

With both types of pay increase, it’s a good idea to consider the tax implications, and offer advice to any employees who are concerned about taxes or unsure how they work.

Utilizing a Pay Raise Calculator

A pay raise calculator is an invaluable resource for both employers and employees when it comes to determining salary increases. This tool allows users to input the current salary and desired pay raise percentage or fixed amount, instantly calculating the new annual salary. It can also factor in cost of living adjustments, merit based raises, and any budget constraints the company may face.

Employers benefit from using a pay raise calculator by ensuring consistency and fairness in their compensation decisions, while employees can use the calculator to anticipate their new salary and plan for future expenses. The calculator is especially useful during salary negotiations, when discussing hourly raises, or when considering the tax implications of a pay raise. By leveraging a raise calculator, organizations can streamline the salary adjustment process and maintain transparent communication with their teams.

How often should employees be given a raise?

The employment contracts your team members were given when they joined the company may have already laid out a schedule for wage reviews. If this is the case, you’ll need to follow that contract, and calculate a percent increase in salary following those terms. For example, some employees may be given a cost-of-living increase annually, or they may be paid a certain amount based on the pay band they’re in, and that band may be adjusted on a fixed schedule. The job market and competition for top talent can also influence how often raises are given, as companies strive to remain competitive and retain highly skilled employees.

If you’re negotiating terms for a new employee, you may wish to specify they’ll have to stay with the company for a certain length of time before receiving a raise.

If your company usually reviews wages on a fixed schedule but world or local events mean your employees are faced with a sudden increase in the cost of living, consider whether it’s appropriate to offer an interim pay review or a one-time payment. When making these decisions, companies must consider the overall cost and current economic conditions to ensure any additional raises are sustainable and aligned with the organization’s financial health. If your company can afford to do this, it could help build loyalty and boost morale among your employees.

See more: Inflation: What It Means for Hiring and Retaining Employees

Understanding retroactive pay

Depending on the size of your organization and how payrolls are processed, it may take some time for a pay increase to go into effect. If an employee is awarded an increase as of a given date but the payroll department isn’t notified until after pay is issued for that period, you’ll need to ensure the employee is properly compensated in the form of back or retroactive pay.

To calculate retroactive pay, look at the amount the employee was paid, and how much the employee should have been paid. For example, if you increase an employee’s pay from $35,000 to $40,000, at the start of a pay cycle, they should receive a full month at the higher rate.

If that employee’s details aren’t updated in time, and payroll issues a payment of $2,916.66, they’ve been paid at their old rate. The difference between the old and new rates is $416.67, so they’ll need to have that amount added to their next pay slip.

If the increase happened partway through the month, you can prorate the amount due. For example if the wage increase was awarded halfway through the month, divide $416.67 by two to get the amount owed to your employee.

The Impact of Salary Increases on Employee Morale

Salary increases play a pivotal role in shaping employee morale, motivation, and overall job satisfaction. When employees receive regular salary increases, such as annual salary adjustments, it signals that their hard work and contributions are valued by the organization. This recognition not only boosts employee morale but also encourages higher levels of performance and loyalty.

Fair compensation and transparent communication about salary increases are essential for building trust and maintaining a positive workplace culture. When employees feel they are being compensated fairly and understand the rationale behind salary decisions, their satisfaction and engagement rise. In turn, this can lead to improved company performance and lower turnover rates. Employers who prioritize regular salary increases and open dialogue about compensation demonstrate their commitment to employee well-being, which is crucial for long-term organizational success.

Alternatives to salary increases

While wage increases are something employees value a lot, there are other forms of compensation companies can offer that may still be appreciated. Most employees understand that small and medium-sized companies are affected by inflation, just as they are. If awarding a substantial wage increase isn’t possible for your company, consider providing other benefits your employees may value:

• Work from home/hybrid arrangements may be considered an indirect pay rise because of the money saved on commuting
• Flexible schedules can offer improved work-life balance
• Profit sharing plans may mean employees defer a raise now, but stand to benefit more in the future
• Paid time off or longer sabbaticals may help retain long-term, skilled employees

See more: Employee Experience – What It Is and Why It Matters