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When a new quarter or year starts, the question of pay raises comes up within our teams. Working with business owners and managers I am often asked what I think is a fair raise. Twenty five or 50 cents an hour, a dollar an hour, a hundred dollars a month or more etc.

The answer is none of the above. Firstly, you should have a very clear raise policy and you should have pay bands established. I see businesses with pay all over the place and no logical pattern. This will cause upheaval within a business and opens the door for team confrontation within the team and business leadership.

I usually work with business owners in establishing the following recommendations:

1. Establish position pay bands with a min, mid and max 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 businesses fiscal year end for the business. The owners are able to determine profitability and affordability. (Note. Since Budgeting should be completed, raises should be within the budget.)
4. Effectively communicate the raise policy to all employees and to all new hires during their on boarding process.
5. Drop the employee Performance Evaluation process and put in place a Performance Development process that is not tied to raises. (This is another issue in itself… and I will discuss this in an other article.
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 that 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 say the annualized inflation is at 2% and let’s say the average contracts have signed at 8%. That would make my raise range fall within 2% to 8%. A person who contributes little and 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 are more easily justifiable by business owners and managers. 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 justify your decisions. Just a couple last points, just because you put it in the budget does not mean you need to spend it all. Remember as a business owner any funds not expended results in bottom line profitability. Secondly, it is the individual who decides their lifestyle and it is not the businesses’ responsibility to provide for that. If an employee is living beyond their means it’s their responsibility to control their spending not yours.

ActionCOACH Peter Lepinski

780-814-1700

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