When to give a raise

If you want the best out of your employees, a well-timed raise can help. But how much do you give them – and when?

A small business team climbing a mountain

Rewarding value

Your employees will expect – and often deserve – a raise every so often. You'll need to think about it carefully:

  • When’s the best time to give a raise?
  • How much should you award?
  • Does each employee deserve the same amount?
  • Is a raise the best way to reward good work?

These questions can only be answered by understanding how valuable each employee is to your business.

Give a raise to retain your best employees

People leave their jobs for all sorts of reasons, and pay is a big one. Besides helping your employees meet their living expenses, pay is tied to other measures of job satisfaction. If they’re getting paid right, employees feel:

  • they’re recognized for good performance
  • their job is important and valued by the business
  • they’re keeping pace with their colleagues

So if you're going to hold onto your best employees, you'll need to pay them what they're worth. It's not enough to give the right starting salary and keep up with inflation. You’ll be expected to reward them for improved performance and skills.

If you don't, they may start looking for another job, which can get expensive for you. Replacing an employee can cost a lot. Besides helping you retain people, employee raises will also give you a spike in productivity as morale goes up.

Deciding when and how to give a raise involves a combination of soft skills and hard data. We'll look at the data first.

Crunch the numbers

Modern business software can tell you a lot about the value you get from employees. You can use the information to help decide when a raise is due.

  • Point-of-sale systems will tell you who’s working when you’re busiest
  • CRM (Customer Relationship Management) will show who's generating leads, closing deals or growing accounts
  • Payroll software will reveal what you’re paying employees, and when they last had a raise
  • Performance dashboards will tell you which parts of the business are driving 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

Good managers talk to their employees. Great managers listen to their employees, and act on what they 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.

The squeaky wheel gets the oil, and employees who ask for raises may be more likely to receive them. But if you want to be fair, you need to also consider your quieter employees. Think about people who do their job with little fuss or noise. Introverts regularly get paid less than extroverts, yet they can be just as deserving of a raise. They just won't shout about it.

Choose the right time

Some businesses evaluate their employees once a year to decide who deserves a raise, but you don't have to do it that way. Here are some tips to help you decide when to give a raise:

  • Consider moving away from annual salary reviews. They encourage people to work harder in the months leading up to the review. A better option might be on-the-spot raises. Not only does it keep your people on their toes, it gives them immediate feedback for a job well done.
  • Don't wait until you're asked. If one of your employees asks for a raise, it might mean you've overlooked their hard work. It might also mean they're one step closer to leaving your business.
  • Be aware of your competition. What are they paying? What‘s happening in the wider market? What's the demand for your employees' skills? Keeping your finger on the economic pulse will help you evaluate the right time for a raise. Websites such as PayScale can help you identify the salaries of others in the same roles as your employees.

Five good reasons to give a raise

1. To recognize 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.

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.

What’s the right amount?

Giving too much can cause difficulties. You might create an expectation in that employee or across the business. Employees talk. Even if you request confidentiality, you have to expect that people will figure out what their colleagues are paid.

Look for information about the average wage increase but remember it varies across industry and profession. Consider it a good starting point. You can decide whether individual employees deserve more or less.

There's more to life than money

Your employees don't have the same level of emotional investment in your business as you do. They don't own it – they merely work there. So salary is important to them.

If you can't afford to give them a raise, however, you can make them feel appreciated in other ways. Movie tickets, extra vacation days, restaurant vouchers and office awaydays can all help.

Providing drinks and snacks every Friday afternoon can do as much for morale as a one-off raise – and it's a lot cheaper.

Your commitment to your employees

Raises show that you value your employees. That's vital if you want to get the best work from them. Use accounting tools and your own management skills to decide when to give a raise, and how much to give.

Never forget that without your hard-working employees you have no business. Giving the right raises at the right time is only one part of good management – but it's a big part.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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