How to Properly Manage Employee Salary Raises
How to Properly Manage Employee Salary Raises? Salary raises are more than just a monetary reward for an employee's hard work; they represent a long-term investment by a company in the individual who is contributing to its success.
When done correctly and at the right time, salary increases can be used to attract and retain talented people. But if you give raises too frequently or too early, it may be costly and difficult to hire suitable candidates later on.
Scheduling a salary raise can have a lot of impact on your company's expenses. It's essential to be aware of the various costs associated with such an event and how they will be affected by each possibility you consider. This article will explain how to plan for a salary raise properly.
Understand your company's budget
The first thing you need to do is look at your company's budget for the upcoming year. Find out how much you will be allowed to spend on salaries and try to fit in your salary raise somewhere around that number. You might have to make a few adjustments, but that's okay for the long run.
Set a schedule for your salary raise
Now that you've got a good idea of how much to spend on salaries next year, it's time to set a realistic schedule for your raise. The most important thing is to have it happen around the time you expected, i.e., at the end of the year during an annual review. It will also provide you with more time to manage expenses. If, for some reason, your company doesn't allow for any raises, then wait until next year and attempt it again.
Use accounting software
Accounting software will make future expenses much easier if you want to include salary increases in your budget. The software will help you adjust your budgets for the future and should have a function you can use to set future salary increases. You need to find the one that works best for you.
Know how much you're willing to spend
To ensure you don't overspend, first think about how much you want to spend on your raises, and then stick with that number. You can constantly adjust it later if necessary, but in doing so, make sure not to overspend by more than twice that amount.
Keep an eye on your expenses related to the raise.
You will most likely have some expenses during the year because of your raise, and this is entirely normal. If you use accounting software, you will be able to track these expenses and adjust them at the end of the year. The complexity of tracking these expenses will depend on your accounting system and its functions.
Permit flexibility during transfers
While some companies require that all salary raises occur at the end of the year, others allow for other options. For instance, you might be transferring one employee with a low salary to another department with a higher salary. In such a case, it would make sense to transfer only part of their pay raise so they can receive it sooner without eating up your entire budget for salary raises in one go. It also gives you more time to manage your budget and adjust any other budgets accordingly.
Don't forget about taxes.
If you plan on transferring part of your employees' salary to their following department, don't forget to consider the tax implications that such an action has on the employee. In most cases, such transfers will be considered income and taxed accordingly. It means you will have to pay more taxes to make up for the transfer. Ensure your employees know about this to avoid any confusion regarding their take-home pay.
Make sure your employees know what's going on.
It might seem like a no-brainer, but it's something you'll want to consider before making any adjustments or transfers. If every employee is only receiving half of the change in their salary, tell them what is going on during the raise and where it's coming from to plan for these events.
Consider all other adjustments too.
While you might be making some changes to your organization regarding salary increases, don't forget to look at any other adjustments or relocations. It will include everything from changing your work hours and overtime to moving your employees around and adjusting shifts accordingly. If you make any adjustments, make sure you do it first before making any transfers.
Remember to set realistic targets.
If you're considering all of the previous points, you should now have a clear idea of how to budget for your raise but don't forget that raising salaries at your company is always a risk. You might get away with it this year, but your company might face some financial issues if things start going south. So, make sure you consider all of the possibilities and make sensible decisions so that your company can continue being profitable.
Know your budget
When you're planning salary raises, the first thing to do is to determine your company's budget for the following year. Make sure you get a good idea of how much you will be allowed spend on salary and try to select the amount that allows you to give everyone a raise while staying within budget.
Plan ahead
After you've determined your budget, it's time to plan and work out how much each of your employees will receive. Determine which employees need a raise and ensure that their current salary matches what they should be earning given their experience, skills, etc. In addition, check with each employee about their expectations for raises in future years.
Don't forget about outsourcing costs.
If you're planning on changing over some of your employees to an outsourcing company, don't forget to budget for those expenses. If you have any questions regarding the costs, try not to cut corners and instead contact the outsourcing company and find out what the process will cost.
Keep track of all salary adjustments.
Once you've set up your raises, keep track of all adjustments and transfers throughout the year. Keep good records of what employees are making so that you can update them when necessary or when they come asking for more money. It is especially important if you're planning on giving some of your employees part of the raise early.
Make sure you have enough money for all raises.
As with most aspects of running a business, there is always a chance that your company will not have enough money to cover all salary increases. It is why you want to keep track of your budget and make sure you can pay for everyone's raise and any additional expenses that might occur during the year.
Bear in mind how much extra money will be going out to pay employees' salaries. Also, consider how much less money will be coming in due to people not buying items such as food and coffee at the office.
Ways to respond when employees ask for a raise
There are many different ways in which an employer can respond to the request for a raise from their employee. Here are some of the most common responses from employers and how these responses might affect your relationship with your employer:
- Deny the request outright, stating that you don't have enough time to consider vacation time or not enough performance evaluation feedback to justify a raise.
- Deny the request, but ask for more information, such as when you will be able to apply again.
- Accept the offer and never bring it up again so long as they meet their performance requirements.
- Give the employee a raise, but tell them you will no longer be considering any additional raises for the rest of the year.
- Give the employee a raise and tell them that they can expect regular raises every year.
- Bring up several other things (other employees, budgets, efficiency concerns, etc.) and say that it wouldn't be worth it.
- Tell them to talk to their immediate managers about what they can do better to deserve a raise.
Why it is IMPORTANT to raise Employee Salary
An employee with a good salary would appreciate his job and work hard to ensure that his employer gets the best service ever. Most companies are already aware that paying their employees somewhat will help improve motivation and morale, which is why they offer a competitive salary to new graduates. It is important to remember that even senior employees deserve a decent salary to maintain their motivation because they can also be easily distracted.
To attract and retain talent, an organization needs to offer competitive pay packages so they can stay ahead of the competition. It is also essential for an employer to incentivize their staff by offering bonuses and rewards for outstanding performance when it comes to employee compensation.
How to raise employee’s salary?
There's no formula you can apply when giving salary raises to employees. It's always balancing between rewarding good performance and attracting the best talent, keeping payroll costs down, and maintaining profitability. In most cases, a higher base salary is accompanied by more bonuses and incentives, making up for lower base pay.
To get the most out of your salary-raising program, you need someone to provide you with an objective analysis of the situation based on defined parameters.
1. Performance and Effort – People who make a difference in the organization deserve to be rewarded for it. Pay raises are one of the best ways to recognize a job well done and encourage employees to do even better in the future. Pay raises should be based on objective performance measures and should be aimed at making significantly more money than the last raise.
2. Lead Time – In most cases, the amount of a salary raise depends on when you conducted the performance review (or "pay review") before the new salary level became effective. For example, if you're paying someone a starting salary of $60,000 and it takes three months to complete a performance review and get that person bumped up to $63,000, the company will pay out about $6,000. If the new salary is adequate immediately and the performance review is still in progress, then the amount of the raise may be less. If a performance review is conducted after a salary increase, then you'll have to wait until the next time around to do it again.
3. Cost of Living – If your business has its own benefits package, you can account for living costs in a particular area by factoring in local spending habits. For example, suppose someone lives in an area where non-income-based expenses (housing and transportation) are significantly higher than average. In that case, their salary can reflect that fact by providing more take-home pay or better benefits.
4. Corporate Culture – In some organizations, raises are given to employees to recognize their loyalty and long-term commitment to the company. However, your business needs to ensure that employees get paid based on objective performance measures, not subjective ones such as loyalty or commitment.
5. Business Climate – Companies struggling financially often need to limit costs to survive, which may involve reducing pay increases and bonuses for all employees. Conversely, companies that have been doing well recently often don't need to make any salary increases because they're able to raise salaries without affecting the bottom line (some companies use this strategy as a means of rewarding top performers).
6. Job-Related Reasons – Even though there are no set rules, companies often don't give raises to new employees because they're still learning the ropes. (Of course, if you're looking for fresh talent and have a high retention rate in your organization, don't discount the possibility that someone will make a significant contribution regardless of their previous experience.)
The Bottom Line
The most often quoted rule of thumb is that a base salary increase should be about 20% for the first time after a pay review. However, salaries can be increased up to 100% within some organizations. These are just guidelines to give you an idea of how much it might cost and how long it should take to make your decision.
Whatever you decide to do, try to make the process equitable and the raises consistent. Once the new salary level is set, it should stay that way until you have to revamp your salary-raising policy (hopefully after considering all the factors discussed here).
The time and money spent on a pay review should help your company reward its employees appropriately. However, if you let salary raises get out of control, it can hurt most companies in the long run.
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Written and Published By The Strategic Advisor Board Team
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