How to decide who gets a pay rise

Ideally, the annual salary increase budget for all employers would sufficiently reflect the contribution, success and value of each employee over the past year. However, financial constraints may often hinder pay reviews.

When reviewing a potential pay raise, consider not only individual performance but also pay equity and other factors such as market rates, skill demand, and role responsibilities.

According to the Hays Salary Guide FY25/26, six in ten workers believe they’re underpaid, but salary satisfaction doesn’t always align with income. So, how can employers strike the right balance? Here's what to consider when reviewing pay.

8 key factors in determining salary increases

1. Review individual employee performance

Begin by evaluating each employee’s impact on your organisation. Their most recent performance review is a useful tool for gauging their contributions and identifying those who consistently deliver value.

Consider the following:

• Goal achievement: Have they consistently hit or exceeded targets over the past year?
• Quality and productivity: Review the standard and quantity of their work output.
• Proactivity and leadership: Have they taken initiative, supported others, or introduced process improvements?
• Project success: Did they deliver key projects early, or go beyond expectations?
• Collaboration: Do they contribute positively to team dynamics and culture?
• Skill sharing: Have they passed on knowledge or introduced new capabilities to the team?
• Growth mindset: Have they upskilled, taken on new challenges, or shown a commitment to development?

This type of evaluation supports fair merit increases and helps identify employees with strong future potential.

2. Assess employees’ responsibilities

Each employee’s responsibilities are shaped by their role and outlined in their job description, but these often evolve over time.

Key considerations include:

• Job description review: Reassess the outlined duties to confirm the current scope and complexity of the role.
   
• Additional job duties: Identify any tasks the employee has taken on that go beyond their official job description. These often emerge gradually and can signal the need for role reclassification.
   
• Promotion: If their expanded role warrants a promotion, action it. If budget constraints limit immediate increases, be transparent and commit to revisiting their pay increase when your financial position improves.

While there is no legal obligation to increase employee's salaries, rewarding additional responsibilities supports fair compensation and helps improve employee motivation.

3. Compare market data

Ensure your pay rise decisions reflect current market rates and cost-of-living pressures:

• Industry standards: Compare competitor salaries to confirm your offers remain competitive for each role.
   
• Regional and organisational context: Adjust benchmarks based on your company’s size and location.
   
• Rising cost-of-living alignment: Account for local living costs to prevent dissatisfaction.
   
• Data-driven justification: Market insights reinforce the rationale behind the salaries you set.

To support accurate benchmarking, Hays Salary Guide FY25/26 lists the typical range for each role, including minimum, maximum, and location-based figures.

4. Evaluate skills

When reviewing salaries, factor in the value of an employee’s skills, particularly those that are critical across your workforce. Specialised or high-demand skills often warrant higher pay, even within the same role.

To ensure fair and consistent salary adjustments, define the key skills you reward and establish clear, measurable criteria. This applied to both technical and soft skills, which are becoming increasingly scarce.

According to our our salary guide:

• 82% of employers highlighted the need for people skills, such as communication, emotional intelligence, and collaboration.
• 73% cited the importance of flexibility and adapting to change and uncertainty.
• 59% pointed to the value of creativity, including critical thinking and problem-solving.

5. Factor in role seniority

Seniority often influences salary, but it shouldn’t guarantee an automatic increase. Instead, assess whether a senior title reflects meaningful value.

Look for indicators such as:

• Depth of experience
• Commercial acumen
• Specialist expertise
• Leadership capability
• Industry knowledge
• Strong internal or external networks

Likewise, don’t overlook mid-level employees who demonstrate strengths often attributed to senior roles. If they’re delivering high impact, they may also warrant a salary review. Use seniority as one input, but base salary decisions on actual contribution and capability.

6. Long service and loyalty

High turnover is costly, when a staff member leaves, organisations incur various recruitment costs, including job ads, and time lost doing interviews, onboarding and training. In addition, new hires often need time to get to the same performance level as the employees they replace.

Employees who provide organisations with long service can add a lot of value through loyalty.

So, ensuring your salaries are structured to encourage long service can be a big financial benefit for your organisation. It’s also an essential part of retaining top talent.

7. Prioritise in-demand skills

When reviewing salary increases, consider how difficult it would be to replace a high-performing employee. As per Hays Salary Guide FY25/26, 84% of organisations faced skills shortages in the past year, a clear sign of how competitive the market has become.

If a skilled employee leaves over perceived low pay, the cost of recruitment, onboarding, and lost productivity can easily exceed the cost of a salary increase.

While budget constraints may limit your flexibility, investing in competitive salaries can help retain top talent, and lead to long-term savings and business continuity.

8. Offer non-financial benefits

While salary increases are important, they’re not the only driver of employee satisfaction, especially when budgets are tight.

Many employees value non-financial rewards just as highly, including:

• Flexible work arrangements
• Work-life balance
• Training and development
• Wellbeing and mental health programs
• Clear career pathways
• Extra leave entitlements
• Strong team and manager relationships
• Positive company culture

If you're not in a financial position to increase salaries, offering meaningful benefits can help retain employees. Interestingly, while some organisations offer up to 25 perks, the two most popular benefits attract more interest than the remaining 20 combined, so it’s worth asking your team what matters most to them. Uncover the list of benefits in Hays Salary Guide FY25/26.

Communicate early

If company performance has not been as expected this past year, flag this early with your employees. Let them know as soon as you can that the downturn in business might have implications on salary increases. Don’t wait until a salary discussion to share the implications. Instead, be upfront to help manage employee expectations and minimise disappointment.

If your salaries are below the external typical value, it can impact employee retention and turnover. Hays Salary Guide FY25/26 is based on a survey of more than 12,000 organisations and skilled professionals. Access typical salary trends and insights relevant to your industry. Download your copy today.