How to give a raise: when, how much, and what to consider

Published Friday 5 June 2026

Table of contents

• Why giving a raise matters
• When to give a raise
• How to decide who deserves a raise
• How much of a raise to give
• Five good reasons to give a raise
• Alternatives to a raise
• How to respond when an employee asks for a raise
• How to decline a raise request
• Manage your payroll and employee costs with Xero
• FAQs on giving a raise

Key takeaways

• Giving timely, fair raises helps you retain top talent and avoid the high cost of replacing employees, which the Society for Human Resource Management (SHRM) estimates averages $4,129 per hire.
• Use data from performance reviews, payroll software, and benchmarking tools like PayScale to decide who deserves a raise and how much to offer.
• The average annual raise across employers is approximately 3.5%, but the right amount depends on your industry, region, and the employee's contribution.
• When a raise isn't possible, alternatives like bonuses, extra leave, flexible work arrangements, and professional development can still show employees you value them.

Why giving a raise matters

Pay is one of the strongest drivers of job satisfaction. When employees feel fairly compensated, they're more engaged, more productive, and more likely to stay. Ignoring this reality can cost your business far more than a well-timed raise.

Replacing an employee who leaves for better pay is expensive. SHRM estimates the average cost to replace a single employee at $4,129, and some estimates put it as high as 20% of that person's annual salary. Those costs include recruitment, onboarding, training, and the lost productivity that comes with a vacant role.

If you're still growing your team, understanding the full process of hiring employees can help you appreciate just how valuable retention is. Building a solid employee retention strategy can help you avoid these costs.

A raise signals that you recognise and value your team's contribution. That recognition boosts morale across the business, not just for the person receiving the raise. When your people feel appreciated, they bring more energy and commitment to their work.

When to give a raise

Timing matters as much as the amount. Giving a raise at the right moment reinforces the behaviour and results you want to see more of. Here are key scenarios to consider:

• After a strong performance review: if an employee has consistently met or exceeded their goals, a raise is a natural next step that connects reward directly to results
• When taking on new responsibilities: employees who step into bigger roles or absorb extra duties deserve compensation that reflects their expanded contribution
• Cost of living increases: as the cost of living rises, salaries that stay flat effectively become pay cuts, so periodic adjustments help your team maintain their standard of living
• Market rate changes: if competitors are paying more for the same role, your employees will notice; use benchmarking tools like PayScale to stay competitive
• Retention risk signals: if a valued employee seems disengaged, is interviewing elsewhere, or has received an outside offer, a proactive raise can be more cost-effective than a replacement

Understanding how much to pay employees in the first place also helps you plan ahead for future raises.

Consider moving away from the traditional annual review cycle. On-the-spot raises, given when an employee delivers exceptional results, carry more impact because the connection between performance and reward is immediate and clear.

How to decide who deserves a raise

Decisions about raises should be grounded in data, not gut feeling. A structured, transparent approach builds trust and helps you allocate your budget where it'll have the greatest impact.

Start by looking at the numbers. Your point-of-sale system, CRM, and payroll software can reveal who's driving revenue, improving efficiency, or consistently outperforming targets. Set clear KPIs for each role so you have an objective benchmark to measure against.

Research from the Economic Policy Institute shows that the gap between worker productivity and compensation has widened significantly since 1979, which means employees who are driving measurable results may have an especially strong case for a raise.

Data alone doesn't tell the whole story. Some of your best contributors are the quiet performers: the ones who mentor colleagues, solve problems behind the scenes, or keep operations running smoothly without drawing attention to themselves. Make space in your evaluation process for soft skills, teamwork, and cultural contribution.

Use regular performance reviews as your framework. A consistent review cycle gives you a structured opportunity to assess each employee's progress, discuss their goals, and make fair compensation decisions.

How much of a raise to give

The right amount depends on several factors, but having industry benchmarks as a starting point helps you make confident decisions.

According to PayScale, the average salary increase budget across employers is approximately 3.5%. This is a useful baseline, but the right figure for your business will vary depending on your industry, region, and the individual's role and performance.

Cost of living adjustments are a separate consideration from merit-based raises. In markets where living costs are rising quickly, a raise that only matches inflation may not feel like a raise at all. Where possible, separate cost-of-living adjustments from performance-based increases so employees understand what each component reflects.

Be mindful of the balance. A raise that's too small can feel tokenistic and may even backfire, while an overly generous one can set expectations that are difficult to sustain. Consider fairness across your team as well: significant pay gaps between people in similar roles can create resentment and erode trust.

Five good reasons to give a raise

Not every raise needs to follow a formal review cycle. Here are five situations where a raise is clearly justified:

• Consistent hard work: employees who reliably deliver strong results, quarter after quarter, deserve compensation that reflects their dependability
• Positive workplace impact: some employees lift the entire team by mentoring new hires, resolving conflicts, and creating a more productive environment for everyone around them
• Unique talent that's hard to replace: if an employee has specialist skills or institutional knowledge that would be difficult to find elsewhere, a raise is a smart investment in retention
• Loyalty and long service: employees who've stayed with your business through challenges and growth have demonstrated commitment, and rewarding that loyalty encourages others to do the same
• Taking on new responsibilities: when someone's role has expanded beyond their original job description, their pay should expand too

Alternatives to a raise

Sometimes your budget simply doesn't allow for a pay increase. That doesn't mean you have nothing to offer. There are meaningful alternatives that show employees you value their contribution:

• One-off bonuses: a bonus rewards strong performance without permanently increasing your payroll costs, making it a good option when cash flow is tight
• Extra leave: additional paid time off is a low-cost benefit that employees genuinely value, especially those juggling work with family or personal commitments
• Flexible work arrangements: offering remote work options, flexible hours, or compressed work weeks can improve job satisfaction without any direct cost to your business
• Professional development: funding courses, certifications, or conference attendance shows that you're invested in your employees' growth while building skills that benefit your business
• Recognition programmes: structured recognition, whether public praise, awards, or peer-nominated programmes, can have a surprisingly large impact on morale and engagement

The key difference between a bonus and a raise is permanence. A bonus is a one-time cost, while a raise increases your payroll baseline going forward. When budgets are constrained, bonuses and non-monetary benefits let you reward your team without creating a long-term financial commitment you can't sustain.

How to respond when an employee asks for a raise

An employee asking for a raise is a sign that they're engaged and thinking about their future with your business. How you handle the conversation matters as much as the outcome. Here are some tips:

• Listen without reacting: give the employee space to make their case and avoid interrupting or showing surprise, even if the request is unexpected
• Ask for specifics: encourage them to share the reasons behind their request, including what results they've delivered and what additional responsibilities they've taken on
• Review against your criteria: after the conversation, assess the request against the same benchmarks you use for all compensation decisions: performance data, market rates, and internal equity
• Take time to evaluate: it's perfectly reasonable to say you need time to review the request properly, as rushing to a decision can lead to outcomes you regret
• Be transparent about the process: let the employee know what happens next and when they can expect an answer, as uncertainty creates anxiety

How to decline a raise request

Saying no to a raise request is never easy, but handling it well can actually strengthen your relationship with the employee.

Be honest about why you're declining the request. Whether it's budget constraints, timing, or performance-related factors, a straightforward explanation is more respectful than vague reassurances. Employees can tell when they're being given the runaround.

Offer a clear path forward. Outline the specific goals, milestones, or timeframes that would make a raise possible in the future. This gives the employee something concrete to work towards and shows that the door isn't closed.

Avoid making promises you can't keep. Saying "maybe next quarter" when you have no budget visibility creates false expectations and erodes trust when the promise doesn't materialise.

Consider whether alternatives might help. A bonus, additional leave, or a development opportunity may not be the raise they asked for, but it demonstrates that you're willing to invest in them within your current means.

Manage your payroll and employee costs with Xero

Making smart decisions about employee compensation starts with having clear visibility over your finances. Xero's cloud accounting software gives you real-time access to your payroll costs, cash flow, and overall financial position, so you can plan raises and manage your budget with confidence.

With everything in one place, you can track employee costs, run reports, and see exactly how compensation changes will affect your bottom line. Spend less time in the books and more time building a team that drives your business forward. Get one month free.

FAQs on giving a raise

Here are answers to frequently asked questions about giving a raise.

How often should you give employees a raise?

Most businesses review compensation annually, but there's no rule that says you have to wait that long. Giving raises when employees hit major milestones, take on new responsibilities, or deliver exceptional results can be more effective than sticking to a rigid annual cycle. The key is consistency and fairness across your team.

What is a good raise percentage?

The average annual raise across employers is approximately 3.5%, but a "good" percentage depends on your industry, region, and the employee's individual contribution. High performers or employees in competitive markets may warrant more. Use benchmarking tools to make sure your offers are in line with what similar businesses are paying.

Should you give all employees the same raise?

A blanket raise is simpler to administer, but it doesn't reward individual performance. A better approach is to combine a baseline cost-of-living adjustment for everyone with merit-based increases for employees who've gone above and beyond. This balances fairness with motivation.

What should you do if you can't afford to give a raise?

Be upfront with your team about the financial situation. Explore alternatives like one-off bonuses, extra leave, flexible working arrangements, or professional development opportunities. Setting clear goals for when raises might become possible again helps maintain trust and motivation even during tight periods.