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Which Employee Raise Method is Best for Your Small Business?

In all of our years of offering tax advisement and payroll management to small, medium and large businesses, we have noticed administering pay raises can be quite complicated and have sticky consequences when enacted inefficiently. It requires monitoring of your employees to see where performance excels, meets or falls short of your company’s production standards. Since many small businesses opt to outsource their payroll to our company, we have some tips for you to help determine which merit increase method will work best for your small business.

Determine the Purpose of Your Employees’ Pay Raises

For many small business owners, the point of offering pay raises is often to commend employees on their hard work in helping your business succeed. For others, raises keep their best-performing employees on board before they look elsewhere. There are even rare business owners that offer pay raises regularly because they believe doing so meets the standard for their industry.

Increasing your employees’ pay should serve a three-fold purpose:

  • Maintain or increase employee morale and production
  • Congratulate those who meet and exceed company production measures
  • Remain competitive with the industry and location for long-term employees

Job security is important to many employees, but your employees should have clear “deliverables” that they are required to meet in order to be eligible for a pay raise. This is where performance evaluations come into play.

Be Consistent and Clear with Performance Criteria

When developing performance goals for your employees, place yourself in the mindset of each level in your company. Make sure these goals are reasonable and attainable.

Meet regularly with your managers to provide routine and consistent performance evaluations for and with your employees. While most businesses operate on an annual review, make a note to meet with your leadership team quarterly to evaluate each department’s employees to note changes in productivity, skill set and long-term goals with the company. The goals within these performance evaluations should be available to all employees at all times as mental notes of what to be striving for.

Common Employee Raise Calculations

  • Do thorough research into the industry with the department of labor to ensure your pay grade increases are in line with the industry, location and position. With the position-specific criteria, make sure that experience is a flexible factor because not every employee is going to have the same skill-set in their position.
  • Do review compensation packages. The healthcare changes in today’s market are affecting how small businesses can deliver raises to their employees. Competitive benefits could be used in lieu of pay grade increases because of economic shifts in demand. Buying insurance outside of a company can be quite costly, and citizens without insurance coverage in 2015 will face major tax penalties in 2016.
  • Don’t offer standardized raises where everyone gets the same pay increase. The problem with offering the same raise rate to everyone is simply that it places all of your workers, both the best and the worst, on the same scale. This will result in decreased company morale as well as employee performance.
  • Don’t fall victim to pay compression. Your senior employees deserve competitive wages in line with your industry. If your new employees are being offered salaries equivalent to your senior employees, there is no distinction and praise for performance and/or tenure. You will risk lowering company morale.
  • Do pay attention to how percentage-based raises are implemented when you have employees at different pay grades. You run the risk of a senior employee getting less of a pay raise than a new employee with a higher percentage-pay increase. Make sure your deliverables are clear and provide adequate percentage-based increases based on that criteria.
  • Do listen to other opportunities to increase employee morale other than through pay increases. Health benefits, as aforementioned, are a great opportunity to pursue. Consider also quarterly volunteer opportunities for your teams to build teamwork outside of the office while serving a greater good.

There are many more other criteria and rules regarding employee pay increases. For any other payroll-related questions, feel free to contact the payroll experts at Padgett Business Services®!

Padgett Business Services® offers payroll management and tax services for businesses of all sizes. Our services are proven and effective for many industries including yours! Get started today by calling (706) 548-1040 or filling out our online form!

Do you have the support you need to manage your small business bookkeeping? Schedule a 30-minute appointment to speak with a local small business adviser.

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