Two coworkers walking through an office.
From high performance to length of service, there are several reasons employers choose to reward employees with raises. — Getty Images/PeopleImages

Whether an employee has shown their commitment to a company by staying on for many years, made an effort to prove they can exceed expectations, or developed skills that make them more valuable, there are times throughout any employee’s career when they deserve a raise.

While many businesses offer raises during performance reviews and at the end of the year, awarding on-the-spot raises has become increasingly common, as it immediately provides employees with feedback, encourages hard work, and keeps the entire team motivated.

In the corporate world, raises generally fall between 3% and 5% of an employee’s salary — a significantly smaller cost to a business than replacing an employee, which is estimated at 20% of their annual salary. However, as a small business on a budget, this may not always be feasible.

Here’s how to help your company determine the amount of a raise their staff should receive when the time comes.

[Read: ​​How to Ask for a Raise During a Pandemic]

Criteria for salary increase

There are a lot of reasons employees may be deserving of a salary increase. Here are five criteria to consider when offering a raise and determining how much to give an employee.

1. Cost of living.

As the cost of living rises around the country, wages should be adjusted to reflect the increase. According to the Social Security Administration (SSA), the cost of living is measured by the Consumer Price Index and increases are called cost-of-living adjustments, or COLAs. In October 2021, the SSA determined the annual COLA would be 5.9%, the greatest increase since 1983’s 7.4% hike.

While cost-of-living raises take effect company-wide regardless of performance, there are certain situations where an individual should receive a cost-of-living raise — such as an employee moving to a more expensive city.

2. Retention.

High-performing employees should be rewarded for their hard work; otherwise, they may begin to feel undervalued and seek new opportunities elsewhere. Turnover can negatively impact a business in many ways — from employee morale to the company’s bottom line.

Raises incentivize talented employees to stay, rather than seek employment from a competitor. Employees want to know they are valued by the company they work for. Offering a raise to those high-performing employees shows a mark of appreciation, increasing the likelihood that they will stay loyal and committed to the company.

[Read more: 5 Small Business Owners Reveal Their Best Employee Retention Strategies]

Performance-based raises show an employee that leadership is aware of their consistent efforts and wants to recognize them for the work they’ve put in.

3. Merit.

Merit-based raises are awarded to employees who take on a new role or responsibility, such as those who learn a new skill or earn a certification like becoming a certified public accountant (CPA). According to Patriot Software, merit-based raises should be given to employees who best meet your company’s goals, add the most value, and excel most in their positions.

These raises are an effective way to motivate an entire team, not just the employee who earns the raise. It shows the rest of the staff that if they work hard, their efforts will be recognized and rewarded.

4. Length of service.

Every company experiences good and bad periods throughout its operations. Businesses may choose to reward employees who have stuck through tough times with a raise.

Raises based on length of service, perhaps tied to an anniversary or other significant milestone, reward an employee for their loyalty and commitment to a company over a period of time. While a fluid employment market has made these raises less common, they are a good way to acknowledge an employee’s dedication and loyalty.

5. Performance.

Performance-based raises show an employee that leadership is aware of their consistent efforts and wants to recognize them for the work they’ve put in. These kinds of raises show that dedicated employees’ care and effort haven’t gone unnoticed, and motivate other employees to put in the same amount of time and attention so they too can be rewarded.

Employees are encouraged by performance-based raises to keep up the good work, as they prove with the right amount of effort, there is potential for growth within the company.

[Read: 10 Ways to Keep Your Employees Happy in 2022]

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.

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Published March 31, 2022