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When You Should Not Give a Pay Raise

Getting a raise at work is great news. Perhaps the extra income can help you pay off those student loans a little bit faster. Perhaps it will go right toward a college fund for a child. Or, maybe it will give you that little bit of financial wiggle room that will allow you and your family to take that trip this year. Even small business owners can look forward to tweaking the number on their own paycheck.

Depending on the nature of the business, employees will find that there are different reasons and different situations in which raises are given. Union jobs that have contracts which undergo negotiations may find raises are the result of those, while other jobs have pay scales that reflect education and number of years worked. Whereas, some businesses, especially those in the private sector, often give raises based on merit.

Why Should Your Business Give Pay Raises?

Why should you give an employee a pay raise?

There are a multitude of reasons that businesses should offer pay raises. First of all, an employee’s pay over time should reflect any inflation and raise in the cost of living in an area. More than that, a business should consider granting raises for the following reasons:

In order to attract and keep top talent within the company. A 2016 Gallup Poll shows that almost 60% of American employees aren’t satisfied with the amount of money they earn. If your business is not satisfying your employees they may seek work elsewhere.

-Raise company and employee morale. Employees want to know that they are valuable members of the company. Rewarding them with a raise is a way to illustrate that.

Motivate employees so they know that their hard work and initiative can pay off. Employees can easily become disillusioned if it feels like their hard work isn’t noticed. What is the point of putting in that extra mile for nothing?

When Not to Give a Pay Raise

When not to give a pay raise

There are plenty of pros to offering pay raises, but that doesn’t mean that it is always the right choice for your business. There are a few instances in which offering pay raises would be detrimental rather than advantageous.

When You Can’t Afford it!

The most important reason to not provide a raise in pay is because the business just can’t afford it. Employees can take up a substantial portion of the employee budget–ranging from 30-50%. That includes not only salaries, but also any benefits offered as well. For businesses that are just starting, there might not be any wiggle room to increase that percentage. Or, when businesses have a bad year or two, it is just not possible to pay employees anymore money.

This can be a tough place to be in as a business owner because you want to reward your employees, but pay raises can’t happen. If this isn’t the time for a raise you can try some of these things instead:

-Show recognition. Whether you have an official “Employee of the Month” ceremony, or you simply take the time to personally thank an employee for something specific, a little bit of recognition can go a long way.

-Give out an extra day off. I know of a business, who instead of giving out a holiday bonus, gave each employee an extra paid day off for their birthday. They could take the day off within the month of their birthday. Offering extra paid time off may be more affordable than raising a salary. Determining when that extra time off is could be based on when is the most reasonable time for your business.

-Award tickets to a sports game or show. Sometimes businesses are given tickets by clients that can then in turn be given out to deserving employees. Or, purchasing a few tickets is probably less expensive than a raise.

-Offer flexible working hours. While earning money is definitely an important aspect of employment, increasingly, the freedom of flexible hours is becoming more and more desirable to employees. Providing this as a benefit can help with attracting and retaining a high-level team.

When Employees Aren’t Giving you a Good ROI

As discussed above, in some situations pay raises are based on circumstances out of the control of the boss, for example with union jobs. However, when it is in the control of the business owner or manager, don’t give a pay raise to an employee who is not deserving of it.

The Xero Blog offers ideas for looking at numbers to determine the value of an employee. They suggest examining your payroll software, performance dashboards, point-of-sale software, and customer relations management software in order to get a clear image of how that employee is performing. Xero makes sure to point out that looking at numerical data can’t give you a full picture, nonetheless.

When determining whether or not to give a pay raise, make sure that what the employee is offering to the company is worth the raise. If not, you may want to discuss expectations with the employee and come up with a way to help him or her improve.

Overall, offering pay raises is a good thing that can be highly beneficial to a company and its employees. But, it is important to know when to give them out and when to hold back.

Looking for more accounting and financial advice? Contact us at Lumen Advisory and Finance!