Your employees work hard—and they deserve a salary that recognizes that. Offering a competitive salary also helps you retain top talent.
But sometimes, your employees improve beyond the original amount you offered to pay them.
That’s why every business must know how to calculate a salary increase percentage. Read this simple guide to learn what you need to keep your best employees happy.
Factors Influencing Salary Increases
Salary increases keep wages competitive over time and might even be necessary to match inflation or rising living costs. Here are common approaches businesses use to decide to give salary increases:
- Merit-Based Salary Adjustments. Employees work harder when there’s a link between pay and performance. Merit-based adjustments also reward the best workers for their efforts.
- Qualification-Based Adjustments. Workers who earn new degrees or additional certifications often deserve a higher salary.
- Time-Based Salary Increments or Tenure Assessments. Time-based salary increases reward loyalty and time invested in a company. Companies may promise raises at set increments, like every two years.
- Cost of Living Adjustments. Inflation results in price increases. Workers who don’t get a raise when prices rise lose buying power and might try to find a new job that helps them keep up with costs. These adjustments ensure workers don’t lose ground.
- Pay Band Assessments. Some companies assign employees to pay bands, based on their position. The pay band is a salary range for people within specific roles. Companies should look regularly at these ranges to confirm they’re appropriate based on market wages. Employers should also confirm they’re paying everyone within a band the correct rate.
RELATED ARTICLE — How To Price Subcontract Work
Guidelines for Timing Employee Salary Raises
Before providing a raise, businesses must make sure it’s in the company’s best interest. You want to pay employees fairly, but you don’t want to offer such generous business compensation and benefits that you can’t turn off a profit. To confirm a raise is appropriate, take these steps:
- Give Raises Based on Contracts. Job contracts with workers often require raises on a specific schedule. For example, the contract may say an employee gets a raise once a year.
- Tie Raises to Performance Reviews. If you provide annual reviews, you could give merit-based raises to those who earned them at the time of the review.
- Respond to Outside Events. You can provide a raise to help employees keep pace with rising prices so they can cope with inflation. Or if unemployment is low and finding workers is harder, you’ll have to provide a raise to attract candidates.
- Perform a Market Rate Comparison. Compare the salary and benefits you’re offering. See how they stack up to competitors. Not being in sync with others could cost you profits or skilled workers.
- Consider Budget Limits. Consider what you can afford. Look at how you price subtracted work or other goods or services and see how much money is available for salaries. You’ll have to divide this amount among workers. And remember that this can become more complicated as you scale your business and pay more people.
How To Calculate Salary Increases
To determine how to calculate a raise, take the following steps:
- Choose the Type of Raise. Is it merit-based? Does inflation or cost of living factor into it? You may need proof of these circumstances.
- Check Company Policies. You might have a set amount in your documentation, like an increase of 10% for employees who have been at the company for five years.
- Pick an Increase Type. Decide whether to do a percentage-based increase or a flat wage increase.
- Look at Market Rates. What are workers paid in this position? Does the company have the money to meet that?
- Choose The Amount. Decide how big the raise should be. Do the math to determine the specific increase.
How To Calculate A Flat Rate
Usually, knowing how to calculate a wage increase is easy, since hourly employees often receive a flat rate.
A company that wants to increase salaries by $5 per hour adds that amount to the current pay rate. Someone making $20 who gets a $5 flat rate increase ends up with $25 per hour. Make sure this is reflected in your books so you don’t have payroll errors.
How To Calculate a Percentage-Based Increase
There’s more to know when determining how to calculate a raise percentage. Here are the steps to follow:
- Determine current pay
- Convert the percent increase into a decimal by dividing by 100
- Multiply that number by the current pay
- Add those two numbers together
For example, let’s assume Lisa has a $30,000 per year salary. She’s getting a 2% raise. This is how you calculate how much a 2% raise is per hour:
- Current pay = $30,000
- Percent increase = 2% / 100 = 0.02
- Actual increase = $30,000 x 0.02 = $600
- New salary = $30,000 + 600 = $30,600
Exploring Alternatives to Traditional Salary Raises
You have other options to reward qualified employees beyond a raise. Some alternatives include the following:
- Expand Benefit Packages. Rather than increasing salary, offer better group health insurance benefits or start contributing to a retirement plan.
- Offer Flexible Work Hours. Some employees prefer the opportunity to choose their own hours or work from home rather than being paid more.
- Offer More Paid Time Off. Vacations decrease burnout and are a major benefit to workers. You can offer more days off instead of increasing worker salaries.
FROM ONE OF OUR PARTNERS — What Is the Difference Between Gross and Net Pay?
Mastering Salary Negotiation: 8 Essential Strategies for Employers
Companies often negotiate salaries when hiring new employees. Employees may also initiate a salary negotiation during a performance review. These steps will help you succeed in these negotiations:
- Establish a Salary Range. Research market wages and look at your budget. See how much you can afford to pay for a particular job based on the value the worker brings to your company in advance.
- Familiarize Yourself With Industry Standards. You don’t want to overpay or underpay your workers.
- Understand the Employees’ Expectations. Ask employees early in the job process what their salary expectations are. This will ensure that you’re on the same page.
- Evaluate the Benefits Offered. The entire benefits package is important beyond just salary. Retirement contributions, time off, health insurance, and flexible work all add value.
- Initiate the Negotiation Process. Companies can initiate a salary negotiation discussion. Initiating shows that you’re willing to hear and work with employees to meet their desires.
- Consider a Signing Bonus. If you’re trying to attract qualified candidates, a one-time signing bonus may be more cost-effective than offering a larger salary.
- Anticipate a Counteroffer. Many workers counter the initial offer. When deciding the salary you’ll suggest, anticipate this. Make sure you know the ceiling of how high you’ll go.
- Communicate Your Preferences Clearly. Being transparent benefits both companies and employees. If a certain salary is off the table, let them know early on.
RELATED ARTICLE — How To Scale Your HVAC Business
Stay Organized and Manage Customers On the Go
Managing your employees’ salaries is only one part of your job as a business owner. And it’s one of many areas of your finances to keep organized. But you don’t need to worry about managing your customer information. Joist makes it easy. With Joist, you can store, access, and export customer information anywhere, at any time.