How to Determine Year-End Employee Raises | Fora Financial Blog
How to Determine End of Year Raises for Your Employees
November 23, 2018

How to Determine End of Year Raises for Your Employees

When you own a small business, every employee you hire directly impacts the success of your organization. Not only is it important to attract talented workers, you need a way to keep them loyal and engaged. End-of-year raises are a great opportunity to show your team that you appreciate their performance and dedication. And, if you communicate expectations well, you can use a potential pay increase to motivate your employees to work harder in the year ahead.

There’s no silver bullet for determining how much to raise your employees’ compensation. Below are several benchmarks you can use to decide how much to increase payroll this year-end.

6 Tips for Determining Year-End Raises:

1. Review Market Comparables

It’s important to understand how your competitors are paying their employees and to review this information on a regular business. Otherwise, you risk losing your best people to better paying companies. According to recruiting firm Ajilon, 43 percent of employees said they would leave their current role for a job at another company that paid better. Checking market comparables and calculating raises accordingly is an easy way to make sure you’re paying your employees competitively.

2. Base it on Company Performance

One way to promote employee buy-in is to base year-end raises on company performance. For example, if your business hits certain sales or profit goals, employees get to share in the company’s success. While this method directly incentivizes your employees to put the interests of the business first, it may leave your employees unsatisfied in years when disappointing company performance is beyond their control.

3. Recognize Individual Merit

One of the most common ways to allocate year-end raises is to base them on individual merit. Indeed, 88 percent of employers use performance as a driver of base salary adjustments, according to consulting firm Mercer. You can determine individual contributions through a combination of objective performance appraisals, employee self-assessments or peer evaluations. Not only is this an effective way to identify poor performers, it allows you to recognize employees that go above and beyond the normal call of duty and keep them motivated.

4. Use Goals-Based Assessments

Using the same scale to evaluate individual performance may not be fair to all employees. At the beginning of each year, consider setting goals for your employees based on their job descriptions and duties, then review their progress towards these goals throughout the year. After this, you can decide to allocate pay raises based on whether your employees meet or exceed the expectations you set each year.

5. Balance Loyalty and Performance

While it’s important to recognize outstanding performers, rewarding employees who have stayed with you through good times and bad shows that you also value loyalty. While you may not want to base raises on tenure alone, including it in your calculation can be a good way to encourage consistency long-term by avoiding excessive employee turnover.

6. Give the Same Raise Across the Board

One of the simplest ways to determine pay raises is to give everyone the same increase, whether on a dollar amount or percentage basis. While this method may seem most fair — and the easiest to calculate — it may not be the best way to keep your employees engaged if they feel they’ll get the same raise regardless of how hard they work.

However you decide to allocate pay raises, clearly communicating the criteria you use to determine increases each year is essential. Once you set the standard, make sure your employees know what to expect, especially in years when the budget is tight. According to research from PayScale, employees are more likely to leave when they don’t receive a rationale for being denied a pay raise — or don’t believe the rationale they were provided.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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