How to decide who gets a pay rise

In an ideal world, the annual salary increase budget would sufficiently reflect the contribution, success and value of each employee over the past year. However, sometimes leaders find themselves with a salary increase budget that does not stretch as far as they would ultimately like. In this situation, difficult decisions need to be made about which employees to offer pay rises to. Deciding who will receive a pay rise, and the value of each individual increase, requires fair evaluation using set factors that you apply equally to each employee.

8 key factors in determining salary increases

1. Consider each employee’s individual performance

A good place to start when evaluating and determining pay rises is to examine each employee’s individual performance. Have their successes added value and made a difference? To assist, refer to each employee’s most recent performance review. You can use this data to identify if an employee has exceeded performance goals and targets in the past year. An employee, for example, might have mentored another employee, introduced new systems to the organisation or put their hand up for additional responsibilities. Or perhaps they delivered an important project ahead of deadline or above and beyond your expectations. Also consider their attitude to work and performance – do they have a positive impact on other employees? Have they introduced new corporate knowledge into the organisation that other colleagues have benefited from? Your performance reviews are essential documents to begin your salary setting.

2. Weigh up your employees’ responsibilities

Revisit each employee’s job description to clarify their responsibilities. Then take an inventory of any additional responsibilities your employees have that aren’t captured in these documents. You may find that certain employees are undertaking much more responsibility than their job description suggests. Scope creep, after all, is common in jobs. So, if an employee has assumed greater responsibility, you should factor this into your pay rise decision. You should also formally revise their job description – if their responsibilities justify a formal promotion, make it happen. While promotions typically come with a pay rise, if your organisation isn’t in a financial position to offer a salary increase in line with their wider responsibilities, assure your employee that you will prioritise a greater salary increase as soon as you can.

3. Understand typical market rates for each employee’s role

External market rates should also factor into your pay rise decisions. Employees want to know they are being paid a fair rate for their skills and expertise, so make sure you are aware of typical external salaries across your sector or industry. Our annual Hays Salary Guide is based on a survey of over 4,400 organisations and more than 4,800 skilled professionals. You can download a copy to access typical salaries and insights relevant to your organisation. By knowing that the salaries your employees are receiving are competitive with the external market, you can make a strong argument in support of the salaries you set. Not every employer will set salaries that match the averages, of course. The size of your organisation and the region you operate in can play a part. That’s why our salary guide also includes, for each role, a minimum and maximum salary, along with salaries in multiple locations. By knowing these salary standards, you can make more confident decisions about the value of each salary increase.

4. Evaluate your employees’ skills

The expertise and skills an employee holds can also factor into your decision – particularly if certain skills are universal requirements across your workforce. To set salary increases that reflect your employees’ skills, first set clear definitions of the job skills you intend to compensate employees for. Some skills are easier to define in concrete and quantifiable terms than others. However, for a soft skill like teamwork, for example, set clear criteria you can measure your employees against.

5. Consider the seniority of an employee’s role

Employees’ salaries often increase with seniority for various reasons. Senior employees typically offer a high level of specialty knowledge, commercial acumen, experience and leadership talent. However, none of these attributes are inherent characteristics of seniority. So, when reviewing the salary of a senior employee, evaluate whether their seniority is indicative of breadth of experience, commercial acumen, specialist knowledge, leadership credentials, strong relationships and networks, industry insight, and other essential qualities. Likewise, some mid-level staff may be especially deserving of salary increases. Don’t underestimate their capabilities in areas senior staff are normally recognised for. Remember, seniority can inform your hierarchy of salaries, but it shouldn’t automatically mean salary increase entitlement, particularly if an employee’s results and value aren’t amounting to those ordinarily associated with seniority.

6. Length of service

High turnover is extremely costly for many organisations. When a staff member leaves, organisations incur various recruitment costs, including job ads, candidate interviews, onboarding and training. In addition, new hires often need time to perform at the same level as the employees they succeed. Employees who provide organisations with long service can add a lot of value by sheer 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. Skills gaps in your industry or sector

When determining the value of salary increases, consider the difficulty of attracting a new team member if this employee should resign. New Zealand is currently facing a singular skills shortage at a level unmatched in our years in recruitment. Today, 91 per cent of employers are experiencing a skills shortage. If your employee has skills in short supply, take this into consideration when deciding on their salary increase. According to our Hays Salary Guide findings, an uncompetitive salary is the top factor motivating 49 per cent of job searches today, up from 39 per cent last year. If an employee with skills in demand leaves because they perceive their salary is too low, and it takes months to find then train a replacement to perform at optimal productivity, losing their skills may prove substantially costlier than retaining them for a higher salary. When budgets are tight, minimising salary increases is an obvious solution. However, it’s important to keep in mind that the money you invest into salary increases can instigate savings and profits in other areas of your organisation.

8. Consider non-financial rewards

Ultimately, your salary increase budget can only stretch so far. Yes, ensuring your salary offering is competitive is essential, however employees who are happy and productive aren’t just motivated by money. Today, a competitive salary is just one element in the new value exchange between employer and employee. Benefits, flexible work environments, upskilling (link to ‘How to implement a successful learning strategy’), alignment between personal and organisational purpose and strong relationships between a manager and team (link to ‘Treat employees as VIP customers – it motivates more than money’) should now all factor into your strategy. If you feel your employees deserve more than you can offer, why not consider adding non-financial benefits to their overall package to bridge the gap? Engage directly with employees to understand what would retain them. More flexibility, career progression, training, mental health and wellness initiatives and additional annual leave are just some of the non-financial benefits you can use to reward high performance.

Communicating early is key to success

If the performance of your organisation 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 detrimental implications for their salary increase. After all, they have their own cost of living considerations, so communicate the news as quickly and clearly as you can. Don’t wait until a salary discussion to share the implications of poor performance. Instead, make your rationale as transparent as it can be to help temper expectations and minimise disappointment.