How to effectively use salary increases

Salary increases are an important part of staff retention. Used wisely, they express appreciation, boost loyalty and commitment among the staff, and possibly even pay off the employer. But which salary increases are appropriate, and how can managers find the right timing for allowing a pay rise for the team or a single employee? A smart approach to salary increases requires managers to consciously consider the “Why?”, the “How?”, and the “How much?”.

Why? Reasons for salary increases.

A pay rise will have the biggest effect when both sides are clear about the reasoning behind it. There are various reasons for a salary increase:

1. Value Creation

It is very common to motivate the most valuable staff members to keep performing at a high level using salary increases. They exceed expectations, perform better than their colleagues, keep track of what needs to be done, want the company to advance, and independently contribute to adding value.

2. Years of Service

They ensure consistency: employees who have worked for the company for several years. Their loyalty is often rewarded with a salary increase after they meet milestones of five, ten, or twenty years of service.

3. Reliability

There is more to a successful team than its top performers, whose above-average results make them stand out and outshine everyone else. Remember, those who implement the theory into practice are just as important, as they reliably do their work on a consistently good level, day in and day out.

4. Self-Confidence

Some employees are open to going the extra mile, even beyond their current job description. Fostering the abilities of staff members, possibly in conjunction with training opportunities, can be further supported by a pay rise.

5. Team Results

When a team or an entire company has achieved excellent results, a collective salary increase expresses appreciation for their work, and will, ideally, also strengthen the team spirit.

6. Staff Retention

Qualified talents are hard to find. That’s why employee retention matters more than ever and salary increases are a good tool to keep motivation high. However, you should not express counter-offers if an employee plans to leave. A salary increase may keep the employee for now, but the risk of losing him to a competitor with a bigger salary package will stay high.

7. Market Requirements

Especially for positions that are crucial for the business as well as for job profiles in high demand, you should frequently review the salary you offer – the competition never sleeps. If your competitors offer better salary options than your company, you risk that important employees will change jobs in the long run.

How? Types of salary increases.

A pay rise has to create a win-win situation for both sides. For both you, the employer, and your staff to profit from a salary increase, you should make an informed decision on when whom, and why you offer a higher wage.

Salary Increase Based on Performance

Good performance brings good money: top performers are rewarded for their outstanding achievements. This form of acknowledging good work can find expression in a one-time bonus payment or in raising the employee’s salary by a certain percentage.

Company-wide Salary Increase

Every employee of a profitable company with increasing revenues should profit from a salary increase. This kind of pay rise can also be paid as a one-time payment, or it can recur as a regular plus on the payslip. The advantage of company-wide salary increases is that it fosters team spirit. The disadvantage: Top performers may not feel that their performance has been adequately acknowledged, as they perceive themselves as having contributed more than others.

Salary Increases Based on Market Developments

Monitor the salary trends in your industry carefully. If there is a shortage of suitable professional and managerial staff for some positions, this is often accompanied by an increase in salary levels. Always make sure to align your salary packages with what your employees or potential hires would like to have. After the pandemic, for example, many employees might want to keep working from home for two days per week.

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How much? Amount of salary increase.

The average salary increase usually lies between 3 to 4%. Anything lower than that should only be considered as a pay rise if it is otherwise adjusted for inflation. If it is not, inflation will effectively nullify the salary increase. The specific amount of a salary increase in an individual case boils down to a combination of the company’s particular situation and the factors mentioned above.

What about part-time employees?

Part-time employees are often “overlooked” when it comes to pay rises—even though an increasing number of important positions are filled by staff members with reduced working hours. Is one of the above-mentioned reasons apply to your part-time employees? In that case, you should acknowledge them accordingly. Especially when part-time workers do good and significant work and cannot simply be replaced by any other person, they should be considered for a salary increase.

Using Salary Increases with a Goal in Mind

Before you decide to motivate the members of your staff with a pay rise, take a closer look at what drives each individual’s motivation. While one employee is happy with a higher net amount on their payroll account, you might be able to acknowledge the performance of new parents more appropriately by subsidising childcare. A salary increase will have the best motivational effect if it is tailor-made for each employee.

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