How to Determine Your Annual Raises
December 2017
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How to Determine Your Annual Raises
Factors to consider when it’s time for pay increases

When you own a business, determining how much to pay your employees and how and when to give them salary adjustments is completely your call. That can be intimidating, however, especially if you’re a new business owner without managerial experience. Rather than stress yourself out, consider some tips from the experts.

Reflect on performance

While you should be evaluating your employees on a regular basis, companies typically give their employees salary adjustments during the annual review because it’s easier to see what each employee has contributed to your business over the course of a year. Obinna Ezekie from the Young Entrepreneur Council (YEC) told Small Business Trends that “an objective performance evaluation should be used as a basis for pay raises.” He went on to explain that this shouldn’t be the only factor taken into account when considering raises. Your employee’s self-evaluation can be a telling factor regarding his or her potential, and can help you determine whether they have more to contribute to your business than they currently are.

Research the competition

If you want to keep your employees around long-term, it’s important to ensure that their salaries are in line with the average salaries of your competitors. Entrepreneur Joshua Waldron creates wage analysis reports for each department in his company. “[These] show what we currently pay our employees compared to what the average wage is for their job titles nationally,” he told Small Biz Trends. Your employees are almost certainly checking average national and local salary information for their positions. If your raises aren’t up to par, you could end up losing valuable people to your competition.

Determine your budget

Before committing to raises for your employees, Chron contributor W. D. Adkins advises looking at your business’ bottom line to determine your budget. If your profits were lackluster, you won’t be in a position to give out as much in raises as you would like. On the other hand, if you had a lucrative year, sharing the wealth with your high-performing employees could be a great motivator for employees to perform at their highest levels.

Types of compensation

Once you know how much money you can afford to give your employees in raises, it’s time to decide whether you’ll stick with a traditional salary adjustment or a bonus. Investopedia contributor James E. McWhinney explains that across-the-board or merit-based raises might not be the best solution for small businesses when it comes to rewarding their employees. “Companies with predictable and steadily rising profits may be able to [give raises] with few concerns,” he writes. “Those with less predictable revenues, rising costs or variable business cycles may be more reluctant to permanently increase payroll expenses.”

That’s where bonuses come in. Bonuses can be given in addition to or instead of annual raises. According to McWhinney, “bonuses can be easier for business owners to manage because they are a variable cost that be reduced or eliminated if business conditions make it difficult or impossible to fund them.” If you do choose the bonus route, you should communicate carefully to your employees if you’re unable to give them their expected yearly bonuses due to shortfalls in profit margins. “Take care to communicate to staff members that the ability to reduce expenses when necessary not only helps the company save money but also avoids the need to make staff reductions when business temporarily slows,” advises McWhinney. “In a well-run business, cutting bonuses can save jobs.”

Communicating your raises

Whether you are personally planning to communicate your raises to your employees personally or enlist the help of a manager, it’s important to take the right approach. In a December 2016 article for TheBalance.com, human resources expert Susan M. Heathfield advises giving the raise in a dollar amount rather than a percentage, as this is more easily understood by your employees. She also recommends explaining why your employee is getting a raise, going into detail about the specific contributions they have made to your business. Finally, she advises thanking the employee for their commitment to your company and expressing confidence that they will continue to grow and contribute in the coming months and years.

On the other hand, Heathfield recommends staying away from any mention of other employees’ raises or performance. While you want to create an environment that favors healthy competition, you don’t want to create a negative atmosphere between employees who feel like they are overlooked when compared to their peers.

With a well thought-out strategy, your employees’ annual raises don’t need to be a headache. 


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Published by Heritage Bank of Nevada
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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.
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