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Salary Increases: Best Practices for Leaders to Consider

A salary increase is a way of showing your employees appreciation and acknowledging their accomplishments. Top-performing employees earn salary increases to incentivize them to stay with the company and continue their career path.

When considering salary increases, it’s important for you to know when and how to offer them and the factors that should contribute to your decision.

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Best practices in salary increases

Most employees expect to receive salary increases after working for a certain amount of time. Top performers who consistently exceed expectations expect to be paid a salary that reflects their hard work and is equal to their level of responsibility. Employers offer competitive compensation to maintain positive retention rates.

Follow these tips to make the most of your salary increase budget:

Related: Hourly to Salary Calculator for Employers

Be transparent about your budget

In the case of salary increase negotiations, be upfront about what you can offer. If your business budget allows only a 3% increase, disclose that information in a one-on-one meeting with the employee in question.

It’s better for them to understand that you’re doing the best you can. Employees may also feel a sense of satisfaction when they know they’re receiving the largest pay increase possible.

Offer bonuses instead of base rate increases

One practice that can save you money in the long-term is offering regular bonus opportunities instead of base pay increases. Base the bonuses on performance, experience or other factors.

Offering regular bonuses may increase employee motivation. Bonuses offer instant gratification and can be a useful tool for rewarding productivity and success in the workplace.

Take cues from competitors

In business, it’s a good idea to keep tabs on what your competitors are doing. This includes what kind of salaries they’re paying, how often they’re offering raises and how much they budget for an average salary increase.

Gathering intelligence about these topics can help you compete for new hires and negotiate more effectively with your current employees.

Keep raises consistent

Being fair and equal when distributing raises is a crucial part of offering salary increases. Providing higher raises to higher-paid employees or allowing bias to influence your decisions can cause friction, conflict and dissatisfaction among your employees.

Remember that providing fair pay isn’t just important for morale. In many cases, laws, such as the Fair Labor Standards Act (FLSA), require you to pay individuals equitably.

Establish clear criteria

Establishing a set of guidelines for determining raises can help to reduce the influence of personal bias and ensure that all members of management responsible for determining pay increases are using the same criteria to evaluate employees.

Explaining how the pay raise was determined during salary discussions with employees can help reduce the risk of perceived bias and protect your company in the event of disputes.

Bargain with better benefits

If you are unable to offer a monetary raise to a high-performing employee, you have other options for rewarding their hard work and acknowledging their accomplishments. During salary negotiations, offer an improved overall compensation and benefits package instead of a pay raise. Options for improved benefits include additional paid time-off, the option to work remotely or a new workspace.

Where and when to issue raises

There are several important factors to consider when deciding when and where to offer raises, including:

  • Your budget. When salaries increase, costs for your company rise accordingly. Although you may wish to give every employee a generous raise, budgetary constraints may make that impossible.
  • The employee’s level of experience. An employee who has finished a training period may be entitled to a raise. You may also want to reward more seasoned members of your team with a pay raise, especially if they assist with training or serve as resources for their peers.
  • How many years the employee has worked for the company. Many companies choose to recognize years of service milestones with pay raises to improve employee retention.
  • The employee’s qualifications and expertise. An employee who has received more education or training related to their job duties is often a good candidate for a raise.
  • The competitive pay rate. When considering annual wage increases, research the average pay rates for similar jobs in your area using data from the U.S. Bureau of Labor Statistics (BLS). If your pay rate is not in line with current trends, salary bumps may help you retain employees and more easily recruit new hires.
  • The employee’s performance. Rewarding an employee who exceeds performance expectations with a pay raise provides recognition and positive reinforcement.
  • The cost of living in your community. Consult the recent trends in the Consumer Price Index (CPI) for your area when determining pay raises. Changes in the CPI reflect increases and decreases in the average cost of consumer goods and services. During periods when the CPI rises dramatically, pay raises allow employees to better maintain their standard of living by helping them to continue to afford the products and services they use. When the CPI trends downward, cost of living raises may not be necessary, especially if your company provides regular salary increases.

There are many reasons why you might decide to issue a raise to an employee. Salary increases have the potential to help you improve employee satisfaction and increase productivity within your team.

Before you start implementing pay raises, you should consider the best practices for how, when and why to issue them. These may include:

  • Encouraging an employee to stay. If an employee is highly skilled and has an excellent record, it would likely be easy for them to get a job with one of your competitors. People often find that they can negotiate a significantly higher pay rate with a new employer. Offering a raise can help to ensure their loyalty and continued commitment to your team.
  • Recognizing an accomplishment. If an employee succeeds in overcoming a significant challenge or bringing in an impressive client, a pay raise could be the best way to show your appreciation and set a precedent for how you treat employees who exceed expectations.
  • Acknowledging loyalty. Another reason to offer a pay raise is to show gratitude to the employees who have been with you the longest. These employees know your company the best and often have significant industry experience. Showing them that you appreciate their longevity can encourage them to remain with your team.
  • Rewarding exceptional performance. Employees are more likely to work hard and self-motivate if they know there is the potential of a salary increase. If you consistently reward good performance, you’ll strengthen your relationship with your best employees and also encourage average employees to improve.

FAQs about salary increases

Here are a few frequently asked questions about salary increases:

How much is the average pay raise?

According to BLS, wages and salaries in the United States increased by 3.2% between June 2020 and June 2021. Average pay raises often vary as a result of economic fluctuations or inflation. When determining how much to offer as a pay raise, it’s important to research the average in your particular industry and area.

What is considered a big raise?

Based on the current average annual raise figures reported above, anything above 3.2% would exceed the national average. Keep in mind that geographical trends can shape how employees define a large salary raise.

How often should you issue salary increases?

Many employers agree that salary increases should be primarily based on performance and experience. Companies require employees to show commitment to excellence and a guarantee of loyalty before offering a raise.

Instead of scheduling your pay increases for a specific date, you have the option to offer them when your employees reach a meaningful goal or when the company passes a significant milestone. You might also consider giving an annual salary increase when you’re conducting annual employee reviews or at another time of year.

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