Should You Give Your Employees a Pay Raise in 2015?

Employee compensation has been a sticky issue for the U.S. economy, while unemployment rates have fallen, wage growth has remained stagnant. So while the general trend has been towards a recovering economy, most employees have yet to feel the impact in their pockets.

But here’s the good news – 38% of small businesses plan to raise wages and prices in 2015, that’s according to the findings of a 2014 PNC Economic Outlook Survey.
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Your employees are your best asset, and aside from job satisfaction, a pay check is a big deal. But should you give your employees a pay raise this year or would a bonus suffice? Can you even afford to?

Here are three things to consider when making decisions about pay raises:

Can your Business Afford to Make Pay Raises?

Employees are your most valuable asset, but can you actually afford to offer pay raises this year? To help you decide you’ll need to review last year’s financial statements and this year’s forecasts. If sales and income is trending up and is forecast to continue, then you may decide to allocate a portion of your New Year budget to pay increases.

If you can’t afford it, look for other ways to cut spending in your budget. Involve your employees in this process, if they know that the cuts here and leaner processes there will mean more cash in their pockets, you’ll likely see some innovative suggestions.

You might also consider adding other forms of compensation such as flex days (perhaps reserved for employees with the longest tenure), volunteer benefits (which allow employers and employees to fill the gaps they have in their existing benefits packages), or other employee incentives.

Calculating those Raises

Many companies have salary-increase cycles, often to keep up with the cost of living while others provide merit-based pay raises, tied to performance – or both.

If you choose to link pay to performance, you’ll need to set goals each year and appraise your employees against these during their 6-month and 12-month reviews. In advance of the goal setting exercise, set your salary budget as a percentage of your total operating budget (based on your income and sales forecast for the year).

Then determine how you’ll distribute your pay increase budget. A common way to do this is to use percentage points and then rank employees accordingly. For example, your highest performing employee could get 5% and the lowest 2%.

Another option is to use dollars instead of percentages, with the best performer getting more money than the lowest performer. This actually creates a more even playing field, since your low performer may earn more than your highest performer and even with a lower percentage pay raise, may still end up with more money each month than your top employee!

What about Bonuses?

Many companies reserve bonuses for employees who have a direct impact on P&L such as sales reps, technically these bonuses are commission and are paid monthly or quarterly.

Many HR specialists recommend against giving bonuses since they set unrealistic expectations (just look what happens to Clark Griswold when he doesn’t get his) and favor incentive-based performance plans instead. A pay increase is tangible and long-term. Employees see that money in their pay check week after week (thus encouraging employee development and motivation). If they are awarded bonuses only at the year-end, they’re going to have to wait a year to see that cash come around again.

Another option is to combine bonuses and pay raises. Award bonuses (tied to performance) on a quarterly basis – this gives your employee a renewed sense of purpose and incentivizes performance year-round. These don’t have to be large amounts. They can be team-based bonuses – perhaps a team dinner based on performance towards a single goal. Then come year-end award pay increases based on performance against individual goals.