Things for Leaders to Consider When Giving Pay Raises

I firmly believe that hiring and developing top talent is a critical leadership competency. Giving accurate, fair pay raises is part of developing and retaining key people. Great leaders set clear expectations that challenge their people, and they should pay for the performance achieved.

As a leadership coach, I often see leaders who have a blind spot about giving raises. Leaders ask me the following questions all the time.

• What do you think about this proposed raise for this employee?

• How can I get the following raise for this employee approved?

• Can you believe my boss didn’t approve the following raise that I suggested for this employee?

My response is always the following.

• Do you know what that role is currently worth in your market?

• What research have you done to justify your suggested raise in terms of the employee’s market value and performance?

• What have you done to prepare “the powers that be” that a raise is needed?

Often, I find that no research has been done and that raises are “pulled out of the air” and based on emotion. The percentage of the raise and the overall compensation are sometimes arrived at by a gut feeling based on a range that the person’s manager feels is fair. Additionally, because the suggestions come out of the blue, many times the recommendations are met with great resistance from those that must approve them.

I want to point out that raises shouldn’t be expected and just automatic each year. Many companies that I consult with don’t give raises every year.

Furthermore, average pay raises range from about 3–5%. A raise’s size will vary greatly depending on the employee’s experience with the company and overall performance and/or increased responsibilities, as well as on the company's geographic location and industry.

One thing that’s critical in this process is to know the market value in your region for the role in question. You don’t want to pay less than market value. That’s definitely not a good formula for attracting and retaining top talent. But you also don’t want to pay way more than the current market value because this wastes the company’s resources and does the employee a disservice that you may not realize at the moment. For example, employees who are paid way more than the market value are usually the first to be let go if budgets must be cut for any reason. Additionally, if you ever have to reduce the salary of an employee because you were overpaying relative to their market value and responsibilities, you always demotivate that employee, which rarely turns out well.

A leader tasked with giving raises has to have the mindset of an owner from whose pocket the money is coming. Spend it wisely.

Key Things to Consider When Giving Raises

1. Market Value of the Job What is the current market value of the job title in the employee’s geographic region?

2. Performance vs. Expectations Merit raises should be awarded based on whether the employee has exceeded the performance metrics previously agreed upon. If they haven’t met those expectations, they aren’t ready to receive a raise. If you give raises when performance and/or expectations haven’t been met, you’ll get more of the same.

3. Interactions with Co-workers and Clients In a company focused on having a great culture and a great brand in the marketplace, an employee’s interactions with co-workers and clients are particularly important and should be considered when giving raises. Reward behavior that you want repeated.

4. The Employee’s Value to the Company Does the employee exceed expectations? Do they go above and beyond? Are they easily replaceable?

5. Increases in Responsibility An increase in responsibility is an especially good indicator of how much value an employee has brought to the company. You could have two employees with 10 years of experience in the same job, but if Employee A has spent more time and effort and created results for the company than Employee B, then A is more deserving of a raise and/or a higher pay rate.

6. Adherence to Company Values Does the employee live the values and beliefs of the organization? Do they adhere to the cultural norms of the business? If they are not a cultural fit, then a raise shouldn’t be on the table, and a conversation about whether they should stay at the company is needed.

7. Growth and Development Does this employee participate in personal and professional growth and development opportunities? Do they seek out such opportunities without being asked or told? Are they seen as a leader and influencer on their team or in the company?

As you can see, giving raises is a business decision that shouldn’t be taken lightly. These decisions have a lot of ramifications. Finally, after you’ve gone through all the items listed above to prepare a recommended raise, there is one more step to consider. What have you done to prepare the final decision-maker for the raise you’ll be recommending? Sometimes just “planting the seed” that this employee should be considered for an increase can make the decision-maker more likely to accept your recommendation.