About Pay Raises

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Raises: Everyone wants them, but they are not always easy to get and they are rarely big enough. For most employees, raises are awarded on a pre-determined schedule. Asking for a raise outside of this schedule can be the toughest conversation an employee has at work. Some companies have strict policies and guidelines that determine raises. Others make decisions when the need arises.

Function

  • Raises are given for a variety of reasons. The most common is to reward an employee for job performance and longevity in a job. Raises also serve as an important incentive to stay with a company. If the only way to make more money is to change jobs, people are likely to quit to earn more in a new position. This is common for hourly employees in high-turnover industries. Raises can also be awarded to acknowledge that a new employee has met minimum standards or completed an introductory period.

Types

  • Pay raises come in many forms. Hourly employees are often given annual increases. These are most commonly offered once a year, on a designated date, across the board to all hourly employees or those in a specific job classification. Hourly raises may also be based on length of service or added job responsibilities. Both hourly and salaried employees are paid increases to acknowledge promotions. Merit- or performance-based increases are paid on specific schedules or time frames to reward performance. These are the most common raises that salaried employees receive.
    A raise can also be offered as a pay adjustment when it has been determined that an employee is significantly underpaid compared to competitors, other similarly situated employees, or within a designated pay or rate range. Salary adjustments are less common and typically supported by extensive review and structured policy.

Time Frame

  • There are four distinct time frames for pay raises. In the event of a promotion, the raise coincides with the start of the new position or responsibilities. Secondly, employers may bump wages up for new, hourly employees after a predetermined introductory period. Thirdly, most employers use a set date during the year to give raises whether they are across the board or merit-based, called a pay cycle. Pay cycles can be set at any time during the year to coordinate with an employer's budget cycle. Union contracts typically include set dates and amounts for raises for covered employees. Lastly, some employers schedule raises on employment anniversary dates. In all situations, if decision making is delayed until after the intended effective date of a raise, the increase can be paid retroactively.

Size

  • Annual merit increases in the United States average about 4 percent. Within this average compensation, experts consider a 3 percent increase fair and appropriate. Promotional increases are likely to be higher. While 20 percent promotional increases within a company are extremely rare, an increase of between 7 percent and 9 percent is more commonplace. Individuals typically gain large increases in salary only when they accept a new job at another company.
    When organizations set budgets for annual merit increases, they may link specific percentage increases to certain standards of performance or allow decision makers to divide an overall budget. A vice president will be told that her budget increase is 4 percent of current salaries. She can then use performance measures to give 2 percent to some employees and 5 percent to others, as long as the total is within budget. Some companies offer senior executives an option to receive all or part of a raise as a lump sum. In difficult economic times, some employers freeze wages and delay increases, or even ask for reductions in wages.

Misconceptions

  • Asking for or negotiating a raise is challenging. Whether as an adjustment or during a regular pay cycle, conversations will be more successful when employees do their homework. Effective requests include specific reasons, benchmarks and comparable pay information. Asking for a raise should be a strictly business conversation. Employees should not identify personal reasons, such as marriage, divorce, the birth of a child, a new house or a longer commute, as criteria to support a raise request. These non-business-related considerations could result in a discriminatory decision. During regular pay cycles, employees should understand organizational policies and amounts budgeted for increases. While a 3 percent increase may not result in a significant change in take-home pay, it likely represents a solid raise within a company's formula.

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