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.

Some criteria to consider include:

Merit-based increases

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. 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.

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

How to perform a salary increase calculation

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

• A flat wage increase
• A percentage increase

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 of $35,000, increasing to $40,000 after one year. 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 it works out to each week or month. 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:  $35,000 / 12 = $2,916.66
• New Pay: $40,000 / 12 = $3,333.33

After the increase, the employee will receive $416.67 per month more in gross pay.

How to calculate raise percentages for your employees

Percentage-based increases are often given to longer-term employees to cover a rise in the cost of living, or to reflect any new responsibilities the employee has taken on.

The formula for a percentage-based cost-of-living increase is simple:

• (Current Pay / 100) * (100 + Percentage Increase)

So, if you have an employee who’s currently receiving $40,000 per year, and you decide to give them an 8% pay increase, this would be:

• (40,000 / 100) * 108 = 43,200

The employee would receive an additional $3,200 per year.

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.

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.

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. 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.

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