How to Determine Pay Raises (Without Getting a Headache)

Tackling pay raises? It’s not easy.

But it’s a part of every compensation pro’s job.

When you want to make everyone happy (but also do your job right), things can get tricky — fast.

But, fear not! I’m here to lay out everything you need to know about how to determine pay raises.

When do pay raises make sense?

The first step to navigating pay raises is figuring out when and why you should give them out.

Let’s talk about a few good reasons your employees might deserve them:

Performance or merit

Simply put, if an employee is performing well, they might deserve a raise.

Maybe they gained new skills, outperformed their coworkers, or took on more responsibilities — all of the above could be grounds for higher pay.

Promotion or title change

Not all companies give raises when someone is promoted.

But in today’s talent landscape, it’s important to show employees you value their work and contributions.

If you’re promoting an employee, consider pairing that new title with a raise.

Also consider giving a raise if an employee made a lateral move in your organization — especially if they’ve picked up different skills or responsibilities in their new role.

Celebrating a milestone (i.e. 5 years with your company)

If you don’t acknowledge a high-performing employee’s loyalty to your company, you could lose them mentally — and maybe even physically, too.

Keep your long-time employees around and engaged by giving them a raise on their work anniversaries.

Pay raises and top talent

Raises are more than just pay increases — they’re strategic tools that can help you attract, engage, and retain top talent at your organization.

Here’s how:

Better understand your market

It’s easy to lose track of where your organization falls in its market, but regularly market pricing jobs is crucial to recruiting and retaining talent.

Find you’re lagging behind? Pay raises could help bridge the gap.

Issuing company-wide pay raises could be tough — maybe even impossible. But if you can swing it, you can ensure your workers don’t leave your organization for companies that pay more.

Increase employee engagement and prevent turnover

Giving pay raises where they’re due can help increase employee engagement at your organization.

Keeping employees engaged keeps them from seeking out other work opportunities. If they see growth potential and feel valued at your organization, they’re more likely to stay.

Calculating pay raises — the easy way

Determine how much your pay raises should be with these three easy steps:

1. Use data

Before you start talking numbers, price your employees’ roles to gain some insight into what kind of pay they deserve.

Do you pay your employees hourly? Use this free minimum wage map to determine the baseline for your peoples’ pay (but you’ll still want to dig into what your peers and competitors are paying).

After you’ve got a complete picture of your market, discuss your employees’ performance with their managers.

Get to know each individual’s value to your organization and the future of their role. Then, decide on how much more pay they deserve.

National averages for raises are 3 percent overall — 1 percent to 2 percent for low performers, and 4 percent to 5 percent for high performers.

2. Decide if you’ll offer a percentage or a flat amount

It may feel like raises most commonly come in percentage-form, but you don’t need to give them out that way.

Calculate what a certain percentage would equate to in dollars, and give your employees a flat pay raise.

A situation where a flat pay raise would work better than a percentage? If your low performer makes more money than your high performer.

Because even if you give them the appropriate raise percentage, your slacker could still wind up with higher pay than your top worker — even after the increase.

3. Open the conversation

Never give out a raise without talking about it directly with your employees.

Take the time to explain why and how the pay increase was determined — and then keep those lines of communication open going forward.

Here are some easy ways to maintain a productive conversation about compensation with your employees:

  • Talk frequently. Conversations about pay should happen regularly. This helps you figure out your workers’ compensation goals, and it helps them see where they fall in achieving those goals.
  • Always be prepared with the correct information. Approach pay conversations by providing ample context and data.
  • Be empathetic. Try to understand your employees’ feelings, and take those emotions into consideration when you’re planning your talks about pay.

Get more free resources AND free market data with Payfactors Free — a 100% HR sourced benchmarking solution.

Free resources AND free market data with Payfactors Free