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How to Determine Salary Increases

How to determine salary increasesTo better attract and retain employees, employers must have a process in place for how to determine salary increases. You will be better positioned to address employee questions regarding compensation. You will be able to communicate clearly the timing of a salary increase and the criteria that will be used to determine an appropriate salary increase. You will be able to budget more appropriately. You will be perceived as more fair and objective.

Why Offer a Salary Increase?

Employees receive a salary or wage for performing the functions of their position. The specific salary amount paid is dependent on many factors such as: market rates, qualifications of the employee, their experience, their competence and aptitude, and their potential for advancement.

A salary increase is usually provided to an employee for many reasons:

  • To recognize increased competence or skills;
  • To compensate the employee for taking on additional responsibilities;
  • To acknowledge strong performance;
  • To align pay with market rates; and
  • To provide for a cost of living adjustment.

While there’s no requirement, legal or otherwise, for an employer to offer salary increases, it is certainly a common expectation among employees that salary increases will be provided on a periodic basis.

Key Steps and Recommendations

Knowing how to determine salary increases will ensure that the process is fair and consistent. Consider the following steps:

1. Decide on the timing and frequency of salary increases

  • It is at the employer’s discretion when and how often salary increases will be provided.
  • Determine what would be the appropriate timing & frequency for your business.
  • Common options include:
    • Upon successful completion of probation;
    • Upon anniversary date;
    • Once a year at the beginning of the calendar year;
    • Once a year to coincide with fiscal year-end; or
    • Upon attainment of a specific skill or completion of licensing or educational requirements.

2. Determine the criteria that you will use to determine salary increases.

  • Many criteria can be used to determine what a salary increase will be. They can be based on: employee performance, company success, tenure, cost of living and economic conditions are a few examples.
  • Choose factors that make sense for your business, which fit with your overall culture and values, and which will not be too difficult to administer.

3. Establish goals & targets

  • Setting performance goals and targets becomes important if the salary increase criteria you select are based in part or completely on performance.
  • For a pay for performance increase process to work effectively, employees need to be aware of what they are expected to accomplish in order to obtain a salary increase.
  • Ensure there is employee involvement in determining goals so that there is buy-in and commitment to the process.

4. Evaluate performance against those goals & targets

  • At the end of the goal period, compare employee performance to the goals and targets.
  • If the goals, and corresponding expectations, have been met, then that should affect the salary increase amount.

5. Determine the amount of salary increase

  • If this step wasn’t already done earlier on, determine what salary increase will be provided for the level of performance achieved.
  • In addition to individual performance, the amount of increase will likely be dependent on budgetary considerations and company performance as well.

6. Other considerations which could affect the amount of the salary increase include:

  • Company’s annual goals or metrics – Determine whether any specific company performance goals and targets need to be achieved first before salary increases will be provided. If so, communicate this to employees in advance so they are aware of all that can affect their potential salary increase.
  • Internal equity – Ensure that there is perceived equity in the salary increases being provided to employees in the company who perform a similar role, possess a similar skill set, and have a comparable level of performance.
  • Market conditions – It may be worthwhile to be aware of what average salary increases are expected to be in your region so that you know what general expectations may be. If your company’s increases are different than the market rate, you will then need to be able to explain or justify the discrepancy.

Instead of providing salary increases on an ad hoc basis, or only providing salary increases to employees who request one, knowing how to determine salary increases effectively will ensure your employees perceive your process to be fair, consistent, and transparent.

For human resources solutions on how to determine salary increases for your small business, please contact Vancouver-based Clear HR Consulting, or check out the Paying & Rewarding Employees module of our HR How-To Series for Small Business.

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