Pay raise small business guide: When and how to reward your employees

Published Monday 13 October 2025

Table of contents

• What is a pay raise?
• Give a raise to retain your best employees
• Crunch the numbers
• Look after your introverts
• Five good reasons to give a raise
• Choose the right time
• What's the right amount?
• There's more to life than money
• Managing pay raises with the right tools
• FAQs on pay raises

Key takeaways

• Use data-driven decisions to determine fair raise amounts by tracking employee performance through sales metrics, CRM software, and payroll systems to identify measurable contributions to your business success.

• Implement proactive raise timing rather than waiting for annual reviews or employee requests, as employees who ask for raises may already be considering other opportunities.

• Research industry benchmarks and market rates for similar roles using resources like PayScale, then adjust based on individual performance, skill demand, and your business's financial capacity.

• Recognise that quieter, introverted employees may deserve raises even if they don't actively request them, as consistent high performance and unique talents merit reward regardless of personality type.

What is a pay raise?

A pay rise, also known as a pay raise in some countries, is an increase in an employee's salary. This can happen for many reasons, such as strong performance, taking on more responsibility, or keeping up with the cost of living. Deciding on a pay raise is a key part of managing and retaining your team.

Give a raise to retain your best employees

Pay rises help you keep your best people. Pay is the main reason 48% of employees join and stay with a company. When employees feel fairly compensated, they experience:

• Performance recognition: They feel acknowledged for good workProfessional value: Their role feels important to the businessCompetitive parity: They're keeping pace with colleagues and market rates

To keep your best employees, pay them what they are worth. Go beyond the right starting salary and inflation adjustments. Reward improved performance and new skills.

When you reward your team fairly, you are more likely to keep them. Research shows over half of employees would consider switching jobs for better pay. Keeping your team saves you time and money, and pay rises can boost morale and productivity.

Deciding when and how to give a pay rise involves both people skills and data. Start by looking at the numbers.

Crunch the numbers

Data-driven decisions improve raise timing and fairness by revealing each employee's measurable contribution to your business.

Sales and customer data:

• Point-of-sale systems: Show who's working during peak business periods
• CRM software: Reveals who generates leads, closes deals, and grows accounts

:

• Payroll software: Tracks current compensation and raise history
• : Identify which business areas drive the most profit

It pays to set key performance indicators (KPIs) for each staff member. Work out what you need from them to make the business successful. Then discuss those KPIs with each employee so they know what's required of them.

Be aware, however, that these sorts of hard numbers can only tell you so much. You'll also need to try and understand how your employees are feeling.

Look after your introverts

Talk with your employees and listen to their feedback. Act on what you hear.

Informal meetings with your employees can help you identify who feels good about their work and who doesn't. Dissatisfaction won't always be related to pay, but when it is you can potentially resolve it.

Employees who ask for pay rises often get noticed. But quieter team members may also deserve a pay rise, even if they do not ask. Introverts can be just as valuable as extroverts.

5 good reasons to give a raise

Here are effective reasons to reward your employees with a raise.

1. To recognise consistent hard work and achievement

A one-off achievement might not be enough to merit a raise in itself, but consistently high performance deserves a reward; in fact, merit pay is the most common form of performance-related pay for professional and technical employees.

2. For a positive impact on your workplace

You may have a member of staff whose sociability and positive attitude lifts morale or helps promote better teamwork. That has a value and is worth rewarding

3. For a unique talent or ability

If someone on your team would be difficult to replace, a raise could encourage them to stay. And that'll probably be more cost-effective than searching for a hard-to-find replacement.

4. For loyalty and long service

This isn't so common these days, as the employment market is fluid. But if an employee has been with you through some tough times and helped your business survive, you might think about giving them a raise.

5. For taking on new responsibilities

In small growing businesses, people's roles can change quickly. Someone might take on a task to help you out during a busy time and, next thing you know, that job's become their permanent responsibility. Don't lose sight of how people's jobs are evolving.

Choose the right time

Strategic timing maximises the impact and cost-effectiveness of employee raises. Consider these approaches:

Move beyond annual reviews

Annual reviews encourage short-term performance spikes before evaluation periods. On-the-spot raises provide immediate recognition and keep employees consistently motivated.

Be proactive, not reactive

Don't wait for requests. When employees ask for raises, they may already be considering other opportunities. Proactive raises show you value their contribution before they question it.

Monitor market conditions

Track competitor salaries and industry demand for your employees' skills. Resources like PayScale help benchmark appropriate compensation levels for similar roles.

What's the right amount?

Set pay rises you can afford. If you give too much, your team may expect the same every year. Too little may not keep your best people.

Industry benchmarking

Research average wage increases in your industry and region. While UK average raises have typically ranged from 2-5% annually, recent Office for National Statistics (ONS) data identified a 5.2% annual average salary increase, though this varies by sector and performance level.

Individual considerations

Use industry averages as your starting point, then adjust based on:

• Employee performance and contribution level
• Market demand for their specific skills
• Your business's financial capacity

There's more to life than money

Other ways to reward your team If you cannot offer a pay rise, you can still show appreciation in other ways.

Cost-effective alternatives

• Flexible benefits: Extra holidays, flexible working arrangements
• Experience rewards: Restaurant vouchers, team events, professional development
• Regular recognition: Weekly team treats, public acknowledgment, career advancement opportunities

These options often cost less than pay rises but still show you value your team. Many employers help their people through the cost-of-living crisis by offering support, such as financial guidance or help with commuting costs.

Managing pay raises with the right tools

Pay rises help you keep your best people, boost productivity, and stay ahead of your competitors.

Use payroll software to track compensation history and ensure accurate, timely payments.

Performance dashboards help you identify high-value employees who merit raises based on measurable contributions.

to make paying your team simple and support your business growth.

Your employees are your most valuable asset. Paying them fairly helps keep them motivated and loyal. Yet, only about half of employers say they are meeting their pay goals.

FAQs on pay raises

Here are answers to some common questions about giving a pay raise.

What is a typical pay raise in the UK?

There's no single answer, as it depends on your industry, the employee's role, and your business's performance. However, many businesses use the rate of inflation as a starting point for an annual cost-of-living adjustment.

Should I give everyone the same pay raise?

Not necessarily. While it's important to be fair, raises should also reflect individual performance, new responsibilities, and skill development. Tying raises to specific achievements can be a great motivator.

Is a pay raise the only way to reward employees?

No, there are many ways to show appreciation. If a pay raise isn't possible, consider other benefits like extra time off, flexible working hours, or professional development opportunities. These can also improve morale and retention.