An Employer’s Guide to Calculating Salary Increases

Determining salary increases is a critical responsibility for employers, as compensation directly impacts employee retention and job satisfaction.

To ensure fairness and transparency while aligning with business goals, it's essential to use a structured approach based on objective criteria and market data.

This article will walk you through the key factors involved in calculating salary increases, helping you make confident and well-informed decisions—whether for an individual employee or your entire team.

How to Determine Salary Increases

1. Conduct Market Research. Start by analyzing salary trends and benchmarks for your industry and location. Understanding competitive pay rates for various positions will help you offer fair compensation and stay competitive in the job market. Our annual salary guide provides competitive compensation data across industries.

2. Evaluate Employee Performance. Assess each employee’s contributions when deciding salary increases. Performance metrics such as goal achievement, quality of work, skill development, and overall impact on the company should be key considerations.
   
   
3. Align with Company Finances. Before implementing salary increases, review your company’s financial standing and budget constraints. Ensure that raises fit within the organization’s overall financial strategy without compromising long-term sustainability.
   
   

4. Maintain Pay Equity. Consistency and fairness are essential when adjusting salaries. Establish clear, objective criteria for salary increases to avoid favoritism or pay disparities. A transparent process fosters trust and employee satisfaction.

When Is the Best Time to Give a Salary Increase?

Salary increases should be carefully timed to reflect both company policies, budget availability, performance evaluation cycles, and market conditions. Below are common scenarios in which employers typically grant raises:

1. Annual Performance Reviews: Many organizations tie salary increases to annual performance evaluations, awarding merit-based raises based on individual achievements and contributions.
   
   
2. Work Anniversaries: Some companies provide salary adjustments on an employee’s work anniversary, ensuring that everyone receives a review at least once a year.
   
   
3. Promotions or Role Changes: When employees take on new responsibilities, a salary increase acknowledges their additional workload and increased value to the company.
   
   

4. Market Adjustments: If industry salary trends shift or inflation impacts the cost of living, salary adjustments may be necessary to stay competitive and retain top talent.

5. Recognizing Exceptional Performance: Employees who consistently exceed expectations or make significant contributions may deserve a performance-based salary increase outside of the standard review cycle.
   
   
6. Strong Company Performance: When a company experiences financial success, sharing that prosperity through salary increases or bonuses can boost morale and loyalty.
   
   
7. Negotiated Agreements: Salary increases may be predetermined as part of collective bargaining agreements or individual employment contracts.
   
   

8. Employee-Initiated Requests: If an employee presents a strong case—such as expanded responsibilities or outstanding achievements—a salary review may be warranted.

9. Cost-of-Living Adjustments (COLAs): In regions experiencing high inflation, COLAs help employees maintain purchasing power and financial stability.
   
   
10. Retaining Key Employees: If a valuable employee is at risk of leaving due to salary discrepancies, a pay raise may be necessary to retain them.

Communicating Salary Increases

Because salary adjustments can vary based on company performance and economic conditions, clear and transparent communication is key. Employees should understand how salary decisions are made and what criteria influence raises.

Ensuring that salary increases are fair, consistent, and aligned with both employee contributions and the company's financial health strengthens company culture, improves retention, and enhances overall productivity.

By implementing a well-structured approach, salary increases can serve as a powerful tool for motivating employees and driving business success.

If you want to discuss your compensation strategy or hiring options, contact our employment experts today. Our purpose is your success.