When Should You Give Your Employees a Raise?
Today’s post is by our very own Jay Bacrania, senior consultant here at Crews Consulting Group.
Jay’s got a thoughtful, in-depth piece on raise structures. Compensation is a topic many entrepreneurs avoid. It’s about more than money; it’s about people, and people are complex.
I hope you find this piece helpful to cut through the emotional complexity of compensation and establish clear guidelines that will serve you, your team, and your business as a whole.
When Should You Give Your Employees a Raise?
Make Sure You Give Raises for the Right Reasons
Salary negotiations can be some of the most difficult conversations a business owner ever has. Many leaders find the entire process bewildering (and exhausting)—who gets a raise, how often should raises be given, and how should they handle disgruntled employees who don’t get one?
Without clear criteria in place, entrepreneurs end up making emotional or inconsistent decisions when it comes to giving raises to employees. And if employees feel the process is arbitrary or unfair, it can cause real problems in a company’s culture.
On the other hand, when you give raises to employees for the right reasons, you get a good return on your investment, and your employees are well-compensated for working hard and adding value to the company.
While some business owners like the idea of using financial incentives to keep their teams happy, it’s untenable to give big raises year after year. If an employee is doing the same work in the same role as last year, they don’t need to be paid more for that same work this year. Unless you’re also raising your prices every year, continually increasing the cost of labor is out of sync with the rest of your business model.
Here’s how to build a fair and sustainable raise system:
(1) Set the expectation that you don’t give substantial raises annually. When you hire a new employee, communicate that you’re hiring them to do a job at the agreed-upon salary. A raise will only be considered if the role changes or if they hit key milestones.
(2) Start with a solid compensation package. Establish a good baseline of compensation at your company. The best workplaces generally pay at or slightly above market rate AND have also mastered other forms of compensation such as benefits, autonomy, recognition, etc. Salary is a very important piece to master but not the only element to consider. You can usually determine market rate by speaking to their CFO or CPA or by purchasing a commercially available salary comparison survey.
(3) Give annual cost-of-living raises that are tied to general cost-of-living increases. Build a cost-of-living increase into your business model. Employees will be grateful to know their pay will keep pace with rising consumer costs.
(4) Separate performance reviews and salary negotiations. Separating the two can be difficult to do since salary increases may be performance-based. It’s also challenging to reframe reviews and salary negotiations for employees who are accustomed to dealing with both in the same meeting. However, holding separate reviews and salary discussions can offer space to praise the good work of an employee who is on the way to meeting a milestone, motivating them to get there by salary negotiation time. The separation should be meaningful (e.g. performance reviews occur in September and compensation discussions happen in February).
Set aside time to clearly communicate these policy changes with employees, either in an “all hands” meeting or one on one. It’s best to share this information with everyone at roughly the same time so that all employees are on the same page and understand that your decision applies across the board.
Expect that current employees accustomed to annual increases may be upset. Let them know that the new compensation structure will help build a more resilient and effective business, able to withstand challenges and ultimately affording them greater job security.
Set Meaningful Criteria
Creating objective measures for raises is crucial: setting clear criteria gives employees agency, ensures that raises are given for the right reasons, involves employees in your company’s growth and continued success—and takes the emotion out of it for the business owner!
Here are a few ways to structure a performance-centered raise system:
(1) Set meaningful milestones for each role in your business. Determine specific competency milestones that employees can achieve to earn a salary increase. Creating objective measures makes it immediately clear to both you and your employee whether or not they met the criteria.
(2) Develop raise pathways for each role. Show an employee the path to increasing their salary. Some roles may have several “rungs” for an employee to climb, each accompanied by a pay increase. However, other roles may not have additional “rungs” for the employee to climb, which means that they’ll never be eligible for a raise in that role. In that case, be honest with the employee about their current situation. Support the employee in looking up and out of your organization if that’s best for them.
(3) Create an annual bonus structure that compensates performance against specific measurables. As part of this structure, you may decide that some employees are eligible for a share in company profits, depending on individual and overall performance.
Money is meaningful. Many of your employees have families, and their salary is directly tied to the degree to which they can support their loved ones. Setting clear expectations and criteria ahead of time can prevent the disappointment of expecting a large bonus or a big raise.
Communicating early and often is paramount. Conversations about money are difficult, and having well-defined, objective measures shows your employees that raises are not random—they’re earned. Employees who are motivated to earn raises will know exactly how to do so.
Giving raises doesn’t have to be a headache—it can be a way to show your employees that you respect their work and notice when they step up. You don’t need to give raises to employees out of obligation. Instead, think of a raise as a way to celebrate an employee’s growth and meaningful contributions to your business.
If you have questions on how to conduct salary negotiations and performance reviews at your business, send us an email at email@example.com We’ll connect you with a consultant who can help you build a more sustainable raise structure.