At some point, your employee may ask for a higher salary or hourly wage. Although raise conversations can be uncomfortable for both you and the inquiring employee, you need to know how to handle them. What do you do when an employee is asking for a raise?
What to do when an employee is asking for a raise
According to one report, 37% of workers have asked for a wage increase from their current employer. Chances are, your employees may ask you for a wage bump, too.
If you don’t prepare, you won’t know what to do when an employee asks for a raise. Regardless of whether you accept or deny the inquiry, mishandling a raise request can lead to employee turnover, disengagement, or entitlement.
You can help prevent an uncomfortable or harmful raise request situation with the following seven tips.
1. Listen to the employee, but wait to respond
When an employee approaches you with a raise request letter or conversation, you may not be expecting it. Take time to think about the employee’s request before giving them a definitive answer.
Some employees prepare before asking for a raise, giving you specifics about why they feel they deserve the pay increase. Other employees might ask you for a raise without providing further information.
Gather all the details you can from the employee about why they feel they deserve a raise. Be sure to collect information from the employee. And, take down notes when talking with the employee.
Again, wait to respond to the employee. Try to remain neutral while taking notes and speaking to the employee. The more neutral you are, the less likely an employee will bank on getting the pay increase.
Let your employee know that you need time to look into the situation. Consider giving a date when you can reconvene to talk about their request.
2. Conduct an internal pay audit
After speaking with your employee, do your due diligence. Find out whether you pay the employee less than other employees. To see how your employee’s pay compares to their co-workers’, conduct a pay audit.
An internal pay audit compares employee positions, education, experience, length of service at your business, and pay. By comparing factors, you can verify that your raise review process is fair.
Use a standard compensation comparison process to prevent bias during the pay audit.
If your pay audit reveals that the employee earns less than a co-worker in the same position, analyze ask questions like: Has prior negotiation affected wages? Did differences in education, experience, and length of service determined the pay discrepancy?
If your pay audit reveals that the employee’s pay is comparable to their co-workers’, document the information. After conducting your internal pay audit, hang onto your findings.
3. Analyze pay rates outside your business
The next step of your raise request process should be to look at what employees in other businesses earn. If your employee’s pay is significantly lower than the industry average, they may start applying elsewhere.
Be competitive when it comes to an employee’s compensation. Do some digging to find out what businesses in your area and industry pay. Look at posted job descriptions to compare your employee’s duties, skills, and requirements.
Additionally, you can use data from the Bureau of Labor Statistics to find out mean and median wages by industry.
Aside from the BLS, you can use other guides (e.g., PayScale) to help you determine whether your employee’s current pay rate is fair. You can incorporate job pricing tools in your raise determination process.
4. Consider the employee’s value
There’s a possibility that denying an employee a raise will result in them looking for another job. The Harvard Business Review found that 70% of employees who were denied an increase with little or no rationale said they planned on searching for a new job within the next six months.
Before coming to a decision, consider the knowledge, skills, and experience that the employee brings to your business. Would your company be OK if the employee left? How much would the employee’s absence impact your business operations and workplace?
You can assess the employee’s value by looking at historical data. For example, if the employee is a salesperson, calculate how much money they bring to your business.
Also, consider the non-monetary value the employee brings, such as producing innovative ideas, being a committed brand ambassador, or providing exceptional customer service.
Think about how much time and money it would take to replace the employee. How long would the hiring process be? How much money would you spend on recruiting a new worker? Would employees need to pick up the slack? What would your training costs be?
5. Examine pay raise alternatives
If you can’t afford a pay raise but want to show a deserving employee you value their work, you have options. Consider offering a pay raise alternative, like a bonus, more paid time off, or flexible scheduling.
Many employers opt for paying bonuses to employees over raises. The Wall Street Journal found that, between June 2017 and June 2018, employers spent 3% more on benefits and only 2.7% more on salary costs. A one-time bonus may cost you more upfront, but it can save you money in the long run.
You can also appease an employee’s raise request by offering them more paid days off from work. Eighty percent of employees would consider choosing a job with more vacation time over a higher paid position.
Flexible scheduling may include letting an employee adapt their work hours. Or, it could also include work-from-home options. Before offering this raise alternative, consider whether your small business is equipped to accommodate flexible scheduling.
6. Calculate an appropriate raise
Your employee may come to you with a concrete figure they want. But, it’s your responsibility to ensure their request isn’t too high or too low. Before responding positively to an employee’s asking for a raise letter or request, understand how to calculate a raise. Then, determine the employee’s new annual salary or hourly wage.
You can calculate a pay raise by giving the employee a percentage or flat increase.
If you give the employee a flat raise, add the additional money you want to provide the employee to their annual salary. For example, if you’re going to give an employee who earns $50,000 a $3,000 raise, their new pay would be $53,000.
If you want to give the employee a percentage raise, analyze average pay raises or cost of living adjustment. To calculate a percentage raise, multiply the employee’s old salary by your desired raise percent. Then, add that total to their old salary. For example, if you want to give an employee earning $50,000 a 4% pay raise, their new salary would be $52,000 [($50,000 X 0.04) + $50,000].
7. Respond to the employee’s request
Whether you accept, deny, or adapt your employee’s request, you need to have a conversation about your reasoning.
Thirty-three percent of employees who were denied a raise received no rationale. Not talking to your employee about why you deny their request can lead to increased turnover and decreased engagement.
On the other hand, giving an employee a raise without telling them why can lead to an entitlement mindset. And, the employee may tell their co-workers, prompting them to want to ask for raises, too.
When you give employees your raise request determination, give them as much information as you can.
Denying a raise request: If the employee doesn’t deserve the raise, talk about ways they can take on more responsibility or improve their work ethic. Or, you may need to tell a deserving employee that there isn’t room in your business’s budget at this time.
Adapting a raise request: You may decide to give an employee a raise but alter their request. You might give the employee less than they asked for. Or, you might need to offer the employee a raise alternative.
Accepting a raise request: When you accept the employee’s raise request, tell them why. Consider providing examples of the great work they did and how it benefited your business. You might also consider giving the employee more responsibility with the raise.
If you accept an employee’s raise request, remember to update your payroll information. Patriot’s online payroll software makes it easy to update your employee’s hourly or salary rate. And, we offer free setup and support. Get your free trial today!
This is not intended as legal advice; for more information, please click here.