Showing Appreciation and Fairness: How to Calculate Employee Raises

There are plenty of reasons that warrant an employee salary increase.  Dedication, loyalty, performance, and continued education all apply.  But how do you make sure  are fair across the board?  That’s what we’re about to dig into.

Fair warning – it does involve math and rubrics.  You may feel like you’re back in school, but we promise it’s for good reason.  After this, you’ll start with an empty rubric, sprinkle in some employee details, and serve up a fresh salary increase percentage!

First off, let’s start with the categories you should consider.

Cost of Living (COLA)

You have an office and a warehouse full of employees, and you’re approaching the fiscal year.  If you haven’t already begun, it’s time to start thinking about employee reviews.  This includes how you’ll compensate them for things like performance and of course, the natural increase to the cost of living.

So, what is the cost of living?  The cost of living is what you’ll pay for commodities.  In other words, what it costs for you to buy everyday items.  (If you are curious about the cost of living in your state or region, you can find more information in a cost of living index.)  As an employer, staying mindful of the cost of living in your area is the first step for staying on top of calculating employee raises.

While we are discussing living costs, another thing to note is that if you offer pensions to your employees, you could be eligible for a pension COLA (cost of living adjustment).  The purpose of the pension COLA is to make sure that employees’ purchasing power does not diminish the longer they live, due to an increase in the cost of living.  If you offer pensions to your employees as a fringe benefit, you might want to learn more about a pension COLA.

Employee retention for competition

When you’re wooing potential new employees, one of the questions that might come up in an interview is how you calculate the salary increase percentage for employees.  Especially when you are trying to lure a very qualified employee from another company or competitor, it’s important to be ready.

Employee raises should never ever (can’t stress that enough) be calculated based on gender, race, or age (any attribute that is uncontrollable by that employee).  Talk about an HR nightmare!

Employee retention for satisfaction

One of the reasons you hired each of your current employees is because during the hiring process you deemed each to be the perfect candidate for the job.  Now that you have them, it’s important to properly compensate them to ensure they’re satisfied.  One of the ways to keep employees satisfied is to show your appreciation by giving annual raises.

Another reason for giving a raise is the loyalty-based raise.  In other words, use an employee’s length of service to justify an increase in pay.  Employees who stick with your company through thick and thin, and don’t play the company-jumping salary game, should not be at a disadvantage where pay is concerned.

Performance

Besides annual raises to keep employees happy, it’s a good idea to consider also compensating employees for the work they do.  Does an employee have a reputation for quality work above and beyond what other employees do?  Is an employee known for her ability to finesse sticky customer situations, and has helped improve customer retention?

Can you think of an employee who is always the first to volunteer to carry the extra weight during the busy season?  These are examples of the types of employees who would be great candidates for a raise based on performance.

New responsibilities

As you’ve undoubtedly experienced over time, it’s not uncommon for a business’s direction to shift.  This usually means an employee’s duties can also be adjusted.  It doesn’t necessarily mean a complete title change. Typically an employee in an existing role receives new responsibilities to distribute the workload better and accommodate the shift.

When an employee takes on new responsibilities, it’s important to recognize that the existing responsibilities rarely disappear.  If employees are forced to take on more than what they originally signed up for, then they could begin to feel overloaded.

If you compensate the employee for the added work, they might feel like the compensation is worth the extra burden.

Title change

A title change, that may or may not be due to promotion, is another reason you’ll want to know how to calculate employee raises.  Even if an employee’s title change is a lateral move, any title change could affect how to calculate the salary increase percentage for employees.

For example, if you have a sales representative moving from domestic to international sales, there may be differences in the raise percentage, due to how the commissions are calculated.

Higher education

Employees who perhaps have the same title as other employees, but who have a higher education degree, would be good candidates for an education-based pay raise.

You might see employees with higher education upon hire, and you might see employees work toward a higher degree while they are employed with you.  Either way, employees who put in the work to further their education should receive recognition for their perseverance.

How to begin

Now that you know the many reasons that would warrant a pay raise, it’s important to understand how to begin. You need to implement a process for following through on your good intentions.  A great place to start is with the employee review.

Whether or not you have an in-house HR department or you outsource your human resource needs, you should have a file for each employee.  Within that file, you should be accumulating information about your employees.

Be sure to continue to amass details about their performance, responsibilities, title changes, and higher education.  Keeping this data in one place will keep you organized and simplify the review process.

The most important thing to keep in mind when performing reviews is fairness.  Calculating the salary increase percentage needs to be a fair process, avoiding any impression of bias.

A great way to collect data and make analyses in one place is by using something your teachers used (even if you didn’t realize what it was at the time): the rubric.  Rubrics are not just for education—they are useful in many sectors of business.  If you give all employees a rubric tailored for their position and use that rubric, complete with evidence to support your analysis, your employees should feel confident that their review is conducted fairly.

How to calculate employee raises

After you’ve established a rubric for each position, assign a decimal percentage to each row, level of achievement, or performance. This allows you to clearly see what kind of pay increase an employee will receive if that mark is hit. Remember to embed the cost of living adjustment within the percentage you assign.

For example, if an employee who performs in the 4th out of five tiers receives a 3% salary increase, you will assign a .03 to the row or level.  The next step is to take the employee’s salary and multiply it times the decimal.

For example, if the employee’s salary is $50,000, then you would take $50,000 x .03 = $1,500.  Finally, divide $1,500 by the number of pay periods in a year. If you pay weekly, you will divide by 52 pay periods.  If you pay bi-weekly, you will divide by 26 pay periods.  For a Semi-Monthly schedule, divide by 24. For a Monthly schedule, you will divide by 12 pay periods.

This final number will be the additional dollar amount your employee receives with the salary increase.  So, an employee who receives a 3% raise will receive an additional $57.69 per pay period, if paid bi-weekly.

Putting your money where your mouth is

At the end of the day, the most important gesture when calculating a salary increase percentage is appreciation. If done fairly, it will be done appropriately.

About Journey Employer Solutions

Service: Journey puts service above all. We believe if you offer a great price and great technology, but don’t have A+ level service, it’s worthless.
Technology: Journey has the advantage of being forward thinking and fast moving. Our decisions are not based on stockholders, but on clients looking for advanced offerings.
Value: Journey takes a client trusting their team as a crucial part of their business very seriously. We realize cost is an important consideration and set extremely fair pricing.

This is not meant to provide legal counsel or advice. Every situation is different. Please contact an HR professional or employment attorney before taking any action.

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