Jul 30, 2025

How To Budget for Salary Increases

One of the most important ways for an employee to feel valued by their company is to receive a salary increase. This also helps with retention! Read through for ideas on deciding how much of a salary increase should be awarded to your employees.

While there is much to be said for the sheer satisfaction derived from a job well done, the reality is that mortgages and living expenses must get paid, and so must your employees. With the cost of living rising all across the country, people are having a hard time making ends meet. Some of your staff may feel dissatisfied with their current salaries and have started to look around for greener pastures. Before your valued employee finds another job, now may be the time to look at your company's compensation structure.

The first thing to look at is the criteria your company has in place for awarding increases. Criteria include:

• Merit-based increases, which tie raises to positive job performance.
• Time-based raises, which are based on the number of years an employee stays with the company. Usually, this is spelled out in the employee's contract. The increases are a way of fostering company loyalty and low employee turnover.
• Cost of living increases, which may be given to employees on a one-time basis to cover unusual circumstances or to help them keep up with the rising costs of essential goods and services.
• Pay band evaluations, which should be carried out on a regular basis to ensure that everyone on the team is being paid fairly. It is common for those who have stayed with the company for years to see smaller increases as compared to newcomers. Those who move from job to job can negotiate their salaries with each move and could be better compensated than those more loyal employees. Managers need to evaluate each individual employee to make sure they are being fairly paid.

If you have decided to increase an employee's wage, you will need to perform a salary increase calculation. There are two basic types, a flat wage and a percentage increase:

• Flat wage increases are usually announced in job postings indicating a starting salary, with a new salary offered after one year of employment. Here is an example of how to calculate a flat wage increase:

                     Former pay:   $50,000 / 12 = $4,167

                     New pay:       $55,000 / 12 = $4,583

The employee will realize $416 more each month in gross pay.

• Percentage increases are usually given to longer-term employees to cover cost of living increases or to reflect a change in responsibilities. The formula for calculating this raise is as follows:

(Current pay / 100) * (100 + percentage increase)

Another consideration is how often employees' salaries should come up for review. Some employees may have entered the company with a contract that laid out how often they come up for review. You'll need to adhere to this. For new employees, you may want to specify that they remain with the company for a set period of time before they are eligible for an increase. If your company is on a fixed annual schedule for salary increases, the company may have to adjust and award interim raises if changing world or local events significantly alter the employees' cost of living. If the company can help ease this burden, that will go very far in bolstering employee loyalty and morale.

Salary increases offer greater financial stability for employees, giving them the opportunity to manage their expenses and improve their personal goals. Long-term benefits for the business include retaining talent, a positive working environment and increased productivity. Clearly, it is a win-win situation for both parties. Give serious thought to how you will manage raises at your company.

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