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Pay Raise Process

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Working with business owners I am often asked what I think a fair pay raise is and when is the right time to give employees raises. And how much is an appropriate raise? 25 or 50 cents an hour, a dollar an hour, a hundred dollars a month or more… Should raises be given once a year, twice a year, at the employee’s anniversary or at the start of the New Year? Or none of the above?

Firstly, you should have pay bands established with a very clear pay raise policy. I see businesses with pay all over the place and no logical pattern. This will cause upheaval within a business and also opens the door for team confrontation within the business.

I usually make the following recommendations and work with business owners in establishing the following.

  1. Establish position pay bands with a minimum, middle and maximum for each position.
  2. Only give pay raises based on a percentage basis. DO NOT give raises based on Dollars.
  3. Have a set time each year to give pay raises. Usually this will be within the quarter following the business’ fiscal year end or with the yearly anniversary of the employee. In this way the owners are able to determine profitability and affordability. (Note: Since budgeting should be completed, raises should be within the budget and planned for.)
  4. Effectively communicate the pay raise policy to all employees and also to all new hires during their orientation process.
  5. Drop the Employee Performance Evaluation process and put in place a Perform Development process that is not tied to raises. (This is another issue in itself…)
  6. DO base raises on employee engagement and contribution to the success of the business.

There are a few things that come into play to establish the pay raise percentage per employee. The first thing I look at is what is in the bucket for pay raises. For example let say that you have budgeted 10% increase in the payroll bucket for pay increases this year and let’s say that equates to about $8,000.00 for the entire team. (Not including owner’s salary and ROI).

First I look at establishing the low and high percentage range. The low is based on the annualized inflation rate and the high would be based on an average of what unionized businesses are settling for within your respective industry. If there are no unionized business look at what other businesses have offered etc.

For example let’s say the annualized inflation is at 2% and let’s say the average contacts have signed at 8%. That would make my raise range fall within 2% to 8%. A person who contributes little and in not fully engaged would only get a 2% raise, a highly engaged person who contributes to the business would be at the top of the bucket. You could also add an additional 2% to the odd individual that went beyond the expectation into helping the company grow or prosper, or provide an incentive bonus based on profitability for those few individuals.

Using percentage based raises is more easily defendable by the business owners. Regardless of how many dollars you give a person in a raise it is never seems to be enough. However, if your percentage is in line with what other percentage increases are you can defend your decisions. This reduces the chance a team member would present an argument, but remember, just because you put it in the budget does not mean you need to spend it all.

Remember it is the individual who decides their work ethic, and it is not up to the business to keep giving if the work isn’t there. In this way the team helps decide their pay raise. Secondly as a business owner any funds not expended results in bottom line profitability.

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