Salary Increases & Annual Raises

Annual salary increases allow workers' pay to keep up with inflation.
Annual salary increases allow workers' pay to keep up with inflation. (Image: Images)

Companies often award employees salary increases on a yearly basis. These annual raises are meant to help account for the fact that the cost of living rises as time passes, plus reward employees for a job well done. Understanding how annual salary increases are awarded and how large those raises typically are will help you determine whether you’re being appropriately compensated.

Function for Companies

Companies know that employees who don’t feel that they’re being properly compensated can always look for work elsewhere. Annual salary raises are companies’ way of telling employees that they appreciate the work the employees do and want to keep them happy. It’s essentially a retention strategy. Salary increases also serve as a motivational factor to get employees to focus on improving performance, because they know that a job well done will be rewarded with a healthy raise.

Function for Employees

For employees, salary raises serve to ensure that what they earn keeps up with inflation. Without salary increases, an employee would find that as the costs of living rise, his earnings don’t reach as far. Some companies provide cost-of-living increases yearly but also up compensation based on merit. The cost-of-living increases ensure that their pay accounts for inflation. Merit-based increases, on the other hand, are awarded for a job well done and allow employees to earn raises larger than those that account just for inflation, making their earnings go farther.

The State of Raises

In a bad economy when employers have resorted to laying off employees and freezing salaries, annual raises tend to be minute or nonexistent. However, after years of pay freezes, in 2011 98 percent of companies polled for the U.S. Compensation Planning Survey said they planned to give employees base pay increases for the year.

What to Expect

In 2010, the average U.S. company that actually awarded pay increases gave employees annual increases totaling between 2.3 and 2.7 percent of their salaries, according to the same study. In 2011, companies polled by the same study reported that they planned to award their employees increases of between 2.7 and 2.8 percent. In 2009, the average reported was 3.2 percent. On the other hand, the report found that employers are not compensating everyone equally. In an effort to retain top producers, many are offering bigger raises to these individuals. This is in keeping with past trends. In 2010, the weakest performers received an average pay increase of just 0.5 percent, while the most talented employees received on average about 4.3 percent increases.

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