A man with gray hair and blue eyes is seen from the waist-up. He is wearing a collared shirt and tie under a navy blue sweater and shaking hands with another man sitting across from him, out of focus. Also out of focus in the background is a large, open room with green light fixtures hanging from the ceiling.
Small business owners often must strike a balance between giving raises to employees and having the resources needed to stay active. — Getty Images/shapecharge

It’s customary for businesses of all sizes to give employee raises, not only to reward hard work but also to help keep up with increases in the cost of living. And this year, inflation is causing many employees to proactively ask for higher salaries. Business owners need to think seriously about how much to give when allocating raises, since pay increases impact your payroll and your bottom line.

Benchmark against national trends

Nationally, raises are on the rise. This is a good benchmark to keep in mind as you seek to retain great employees, recruit new ones, and stay competitive in your market. A recent survey from Salary.com found that this year, a median raise of 4% across all employee categories has become the norm, replacing the long predominant 3% raise.

“Forty-eight percent of U.S. employers are planning higher year-over-year salary increase budgets for 2023, continuing an upswing that began in 2022. Even more promising for American workers: a quarter of employers plan to give increases in the range of 5–7 percent in 2023,” said the report.

What’s behind the higher salary increase? Generally speaking, there are three types of raises that this median raise percent reflects. One is a general increase in compensation, known as a cost-of-living adjustment to keep up with the rate of inflation. The second is a merit increase, rewarding a great employee for their performance. The third type of raise is a market adjustment to bring a worker’s salary in line with their peers.

[Read more: Time for Employee Raises? When and How to Give Employees a Pay Boost]

Keep the rate of inflation in mind

While a 4% raise may seem reasonable, it’s still not in line with cost-of-living changes that are taking place. Despite the fact that typical salary raises have increased, the current 8.5% annual rate of inflation is still much higher.

For small business owners, this may have a bearing on how you choose to increase pay. Salary.com’s study found that small businesses tend to offer more generous raises than enterprises.

Forty-eight percent of U.S. employers are planning higher year-over-year salary increase budgets for 2023, continuing an upswing that began in 2022.

Salary.com

"This could speak to the relationship smaller companies have with their employees, versus at bigger companies where you're just a number," Andy Miller, Salary.com's Managing Director of Compensation Consulting, told CBS News. "They're really reaching out and wanting to make sure employees feel cared for, and maybe they have to do that to compete with bigger companies."

It’s great to offer higher raises when you can — and your employees will certainly appreciate the extra support. But if you’re operating with limited resources, you may need to make some hard choices about how much to give.

[Read more: Time for Employee Raises? Here's How to Decide How Much to Offer]

How to decide how much to give

Beyond using national data, deciding how much to offer to your employees tends to be based on each business owner’s unique position and financial ability. Of the three types of salary increases, many employers rely on a combination of performance-based raises and cost of living increases.

“Many employers agree that salary increases should be primarily based on performance and experience,” wrote Indeed. “Companies require employees to show commitment to excellence and a guarantee of loyalty before offering a raise.”

Deciding how much to offer can also depend on your industry and location. In healthcare, for instance, median increases were significantly lower than the national average. This discrepancy is largely due to reimbursement limits imposed by federal and private health insurers. There are also minimum wage increases coming for certain states — in New York, the Minimum Wage Act requires that all employees receive at least $14.20 an hour beginning December 31, 2022.

A good alternative to a wage increase is to offer bonuses. For businesses that might not be able to sustain long-term higher wages, consider offering a reward for hard work at the end of the year. Bonuses can boost morale and improve retention, while still helping your company stay on budget.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

To stay on top of all the news impacting your small business, go here for all of our latest small business news and updates.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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Published October 12, 2022