Best Practices in Issuing Pay Raises

More than half of respondents to the 2018 Salary Report sponsored by online job site Indeed.com said they’d consider changing jobs to get a raise. Typically, business owners offer raises that recognize employee expertise, accomplishments and loyalty while keeping their pay scales roughly in line with those offered by other firms in their industries and geographic locations.

A business might want to reward specific employees who’ve made outsize contributions to the company, but it will also want to maintain a level of equity with other workers’ compensation. And, of course, management needs to keep payroll costs in line. So how do you balance what can seem like competing goals?

Balancing Goals

Money can be a sensitive subject for many people. Employees often view their salaries and raises not just as a means of providing for themselves and their families, but as an indication of how the company values their contributions. The ways in which managers decide on, and communicate, raises and other salary adjustments can affect employee morale and performance.

Consider developing a standard set of criteria to determine pay raises and apply it to employees within a particular function or group. Among the benefits of set criteria is that it reduces the perception of, and opportunity for, bias. Even a perception of partiality can dampen employee morale. Over time, it even may harm retention and performance.

And by standardizing the criteria you use to determine raises, you’re less likely to wind up with significant variations in compensation between different groups of employees. For instance, the Indeed.com survey found that men are more likely than women to ask for larger raises. In addition, men and women of color who ask for a raise are less likely to receive one than white men (according to PayScale’s Raise Anatomy study). Standardized criteria can help ensure that, as much as possible, compensation fairly reflects performance.

Using Raises to Achieve Goals

This doesn’t mean a business shouldn’t use raises to recognize and retain individual employees who’ve met or exceeded the goals set before them. When raises are tied to employees’ goals, those goals should be clearly communicated, measurable and challenging — but within reach. Goals should be both specific to a particular employee’s actions and tied to broader corporate goals. For instance, a goal set for a warehouse manager could be to increase the percentage of on-time deliveries.

Some businesses use raises to recognize seniority. They say experience often has some impact on the contribution an employee makes. In addition, using raises as one tool to reduce turnover often makes sense, given the expense of attracting new employees.

Other organizations maintain that longevity doesn’t automatically correlate with the value an individual brings to the company. In addition, regularly rewarding employees’ tenure with a company can lead to bloated salaries. Many companies look at both longevity and performance when determining raises. Note that all policies around raises and compensation should comply with applicable laws and regulations.

Determining the Raise Schedule

Although many companies issue raises during employees’ annual reviews, other schedules can make sense. If a position typically experiences high turnover, your business might boost retention by offering new employees a modest increase after several months. No matter the schedule, let new employees know when they can expect their first review and opportunity for a raise.

You’ll also need to decide how to handle employees who ask for raises outside the normal review time frame. Some companies assess these on a case-by-case basis, while others flatly prohibit them. If a raise isn’t feasible and you want to retain the worker, you can identify nonfinancial incentives that might appeal, such as a change in title or more flexible working hours.

Keeping Employees in the Loop

Communication around raises can be tricky. Most companies keep individual compensation information confidential. Yet it helps to provide some context about the calculations that determine raises so employees feel confident the raises fairly reflect their contributions and are in line with the market.

When talking with employees about their raises, take enough time to be sure they understand the rationale behind them. Ideally, you’ll be able to identify and thank them for specific contributions that factored into the raise. Your accounting professional can provide additional guidance on developing policies around raises.

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