When & How Should You Give Your Employees A Pay Raise?

Evelyn Hiew
by Evelyn Hiew
Nov 29, 2022 at 10:56 AM

How to make your employees happy? Pay them more. What about retaining high-performing employees? Say it with me: Pay them more. 

I mean, sure, other factors (e.g. company culture, work environment, etc.) may play huge roles in determining whether your employees should stay or leave for greener pastures. But the undeniable truth is that pay raises, bonuses, and above-average wages do make for happy and motivated employees. 

While most companies would love to give their employees a raise yearly to show their appreciation (or, more importantly, to retain them), financially, annual pay raises are not sustainable - and even more so for small business owners. So how do you know when and how to give an employee a raise?

The first and foremost step in determining whether or not to give a raise is to establish several criteria for it. Consider offering pay raises for the following reasons:

  • To reward their length of service

Generally, most companies offer a pay raise to employees loyal to the company. A 5th anniversary, for instance, is a good time to offer a pay increase.

  • To reward good performance

An employee’s exemplary performance and contribution to the company is always a good reason to offer a raise. It also increases job motivation and satisfaction.

  • When the cost of living rises

This type of raise is usually company-wide or applied to specific employees if, for example, you have a worker moving to launch a new location in a more expensive region.

  • When an employee learns a new skill

Taking an employee’s improved skills into account for a pay raise can motivate them to continue using the newly acquired skills (which improves performance) in the company and encourage continuous learning. 

  • When your company’s profits have increased

When the company grows in size and revenue, consider sharing the profits earned with your employees. After all, your employees are the main contributors to the company and deserve good recognition.


But which should I give? A pay raise, bonus, or other benefits? 

Of course, the fact is that most companies will not always be able to give their employees a pay raise. For instance, a tough business year might call for bonuses instead of pay increases. But you may consider a compensation mix, which will cover some of the following incentives:

  • Pay raise: Typically, a set percentage is based on an employee's base pay. Raises result in a permanent increase in payroll costs.

  • Bonus: For instance, a one-time payment tied to sales or production volumes.

  • Benefits: Flexible hours or travel allowances are some examples of such incentives.

In your compensation policy, carefully draft and outline how you will reward your employees with a mix of these incentives according to business conditions.


When should you raise salaries?

Companies typically have annual pay raises during performance reviews or at the end of the year. Others may give pay raises only when the employee has earned them based on their performance, merit, or other criteria. What works best for companies may differ, but it is good to have both scheduled raises and random, criteria-based raises.

A combination of both methods can help ensure that employees are fairly compensated for the criteria aforementioned such as their length of service, the rise of living costs, and company profits - which are more regular - while also acknowledging great performance and new skills immediately after they occur.


How much raise should you offer?

On average, most raises fall in the range of 3-5% of the employee’s base salary, but they can also range from 1-5%. The percentage depends on whether you are giving an annual raise, merit- or performance-based raise, or other criteria-based raise. 

For example, if the pay increase is for the cost of living, you should calculate how much you can afford to pay across the company. If it is for performance, then calculate the raise based on that performance's Return On Investment (ROI). Nevertheless, performance-based bonuses typically range around 1-5% of the employee’s current salary.


Look after every employee, particularly the introverted ones

Not everyone in the company will be outgoing enough to ask for a pay increase. So be sure to take notice and acknowledge their contributions, even if their achievements aren’t as obvious just because they’re less vocal. 


Conduct a regular review of your salary package

Pay is crucial in attracting new talent and retaining your current employees. That’s why reviewing the benefits and pay you’re regularly offering is important, especially when you begin to notice a pattern of employees resigning. Perhaps the base pay or the benefits need to be adjusted. Perhaps it’s time to have more frequent or higher pay raises. Reviewing regularly will help you reduce the chance of high turnover and, more importantly, ensure your employees are satisfied and happy in the company. 


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