Around my office, this time of the year is known for “R&R.” I wish that stood for rest and relaxation. I wish I could say I planned a time for rest and relaxation each year. No, R&R in my office stands for reviews and raises. I used to dread staff reviews and raises. In fact, I never used to do reviews and raises came sporadically, usually after a big settlement. Now, I go through this process once a year at the same time. This month I will discuss raises and next month I will address reviews.
First, there are several advantages to doing raises and reviews the same time every year. You may not realize it, but employees do expect periodic increases. By giving raises the same time every year, employees can rely on this. Second, it avoids giving increases too frequently or not enough. I had an employee ask me for a raise after informing me I had not given her a raise in two and half years. I was rather embarrassed about this fact since it had nothing to do with performance, I had just forgotten. I also mentioned raises used to come after big settlements. Well, there have been some times where we have gotten numerous large settlements over a year and employees began to expect raises every time a case settled. Too frequent or too infrequent raises are not effective. Finally, you can plan ahead and budget when you know that raises will come on a regular basis at the same time every year.
Now that I have a time of the year in which I give raises, the next question is how do you decide how much of a raise to give? There is no magic answer for this question, but here are a few of my thoughts. First, you have to be careful with raises, since once you give a raise, it is essentially impossible to reduce someone’s pay. So, once given, you’re stuck paying that person that amount. Next, with long-term employees, they can become either overpaid or max out what you are able to pay them. If your secretary has been with you for 20 years, she must be invaluable, but if you are not careful, you could be vastly overpaying her through twenty years of raises.
I used to give employees raises based on round numbers, such as a .50/hour raise or $1.00/hour raise. But these raises caused employee salaries to get too high over time, as mentioned above. Raises at these levels also are rather generous. If you pay someone $15.00/hour and you give them $1.00/hour raise, that is a 7.5% increase in pay, which I learned is high.
Now, I search what the average wage increase employers are paying each year and base my raises on that number. Simply search, “average wage increase for (year)” and you will see many resources, which tell you, what the average wage increase will be. It is surprisingly low, usually between 2-3%. This is because inflation has been so low over the past years.
Now when I give out raises, I base it on what the average wage increase is for that year and then I can adjust that amount based on performance. I can tell my employees that they are receiving a raise of 2.8%, which is greater than the 2.1% average wage increase for the year for employers. Or, if they do not warrant a performance based increase, I can simply give them the average percentage raise. I have found employees accept the rational of a percent raise and understand it is based on what the national average is for increases. Going back to my example of the employee who makes $15/hour, a 2.8% increase would be .42/hour. It sounds better to receive a 2.8% raise, which is based on an objective national basis, than an arbitrary .42/hour. I have also found that this allows me more flexibility in rewarding employees based on performance without being too generous.
Raises are important for employee morale and also important to the bottom line. You should go about the process of raises in a systematic and regular basis for the benefit of the employee as well as the office. Increases tie in nicely to employee reviews, which I will discuss next month. In the meantime, if you have any question about employee raises, feel free to contact me.