What is a pay adjustment?

A pay adjustment describes a situation where you change an employee’s pay rate. While the rate change is often an increase, a payroll adjustment can also involve a decrease if the situation calls for it. This change can be temporary or permanent, depending on the situation, and it might apply to just one employee, a group of employees or the entire staff.

Reasons for a salary adjustment

Salary adjustments can happen for various reasons. Sometimes, it’s the result of a company-wide review of salaries. Other times, a specific event triggers the payroll adjustment. The reasons can be specific to one employee, company-wide issues or larger concerns with your industry or the economy as a whole. Some specific reasons companies make adjustments to pay rates include:

• Pay equity. Payroll reviews sometimes reveal pay gaps among employees performing the same duties. A salary adjustment helps you work toward pay equity among your team.
• Duty changes. If an employee takes on new duties, either permanently or temporarily, increasing their pay rate compensates them for the extra work.
• Shift differentials. It’s common to offer increased pay for second or third shift workers when you operate round-the-clock. If an employee moves to a different shift or works varying shifts, a pay adjustment covers those varying pay rates.
• Cost of living. A cost-of-living adjustment accounts for inflation to help employees’ paychecks stretch. If an employee relocates to a different branch, an adjustment accounts for the difference in the cost of living for the new area.
• Competitiveness. Remaining competitive with other employers helps you retain your current staff and attract new talent.
• Compliance. When state minimum wage rates change, businesses need to adjust their pay rates accordingly if some employees don’t meet the new minimum wage.
• Demotion. Poor performance could warrant a decrease in wages if the employee is demoted. A reduction in status typically equates to lower pay due to having fewer responsibilities.
• Corrections. A previous payroll error could result in a temporary pay adjustment to correct the issue.
• Hazardous conditions. Employees who perform dangerous duties may receive hazard pay. These higher pay rates only apply for time worked under dangerous conditions. For instance, an employee might work off-site in a dangerous location for a month and receive higher pay during that time.

How to make a payroll adjustment

Before making a salary adjustment, ensure you follow the proper steps. These tips provide a general guide, but it’s important to follow any state and local labor laws that apply to your business.

1. Write pay policies

Review existing pay-related policies and procedures to verify their accuracy. Address pay adjustments in the policy to inform your employees about possible changes and how you handle them.

2. Review labor laws

Check collective bargaining agreements and other governing documents or regulations that might affect how and when you can adjust payments.

3. Identify the reason for the salary adjustment

Pinpoint the cause for the pay adjustment and have evidence to support your decision. Making salary adjustments often requires research. A company-wide review of salaries might reveal pay inequities, for instance. Researching competitors and industry pay rates could show that your organization pays below the standard.

4. Select the affected employees

Is the pay change for one person, a group of employees or everyone on the payroll? The reason for the change determines who is affected. Lowering pay due to performance issues affects a single employee’s salary. Increases to achieve pay equity could apply to certain employees who currently receive less than others who perform the same duties. Making changes to stay competitive or keep up with inflation often goes into effect for everyone.

5. Determine the adjustment amount

Conducting research helps you select the specific adjustment amount. The reason for the change also factors into the rate. For example, if you’re making your pay align better with competitors, you can conduct market research to determine the average rate in your area. When an employee takes on additional duties, the value and scope of those responsibilities impact the rate increase. To create pay equity, the difference between the employee’s pay rate and others doing similar duties helps you decide.

6. Set the scope of the salary change

Decide if the wage change is temporary or permanent. Temporary changes happen if the employee’s working conditions change for a limited time. Permanent changes often apply to situations such as creating pay equity or adjusting for cost of living increases. Identify the starting day for the change and the ending date if it’s temporary.

7. Get approval

Depending on your company’s policies, you may need to get approval for a pay change. Even if there isn’t a formal process, consider presenting the salary adjustment to all stakeholders and upper management. During this step, stakeholders can raise objections or alert you to possible compliance issues that you missed.

8. Alert the affected employees

Communicate the new pay rate as soon as possible. While a pay increase is a pleasant surprise, you reduce confusion by sharing the good news before the increase goes into effect. Employees also need to know if the increase is temporary, so they don’t expect the higher rates to continue permanently.

It’s tempting to put off news of a pay decrease, but employees need time to prepare for lower take-home pay. Transparency builds trust with employees and makes it easier to handle challenging workplace changes.

9. Make payroll changes

Finally, adjust the pay rates in your payroll software. Ensure you know when the pay changes go into effect and how long they last. Increasing or decreasing wages also affects deductions. If you use payroll software, it calculates those amounts automatically.

FAQs about salary adjustments

What is the difference between a pay adjustment and a raise?

Employees receive raises to reward them for their performance or length of time with the company. These merit-based pay raises often coincide with performance reviews or milestones in the employee’s career. While a payroll adjustment could relate to the employee’s performance, it more often happens due to other reasons, such as improving competitiveness or fairness.