How to handle employee pay raise requests

Video transcript:

Jim Duffy: Despite your best efforts to develop a competitive compensation program, there may be times, such as when inflation is elevated or during a tight labor market, when employees increasingly try to negotiate their pay. Welcome to HRpreneur. I'm Jim Duffy from Main Street to your Street. The HRpreneur podcast is centered around helping small businesses like yours gain the knowledge you need, from HR, payroll, and hiring, to time, taxes, benefits, and insurance. Today, we're joined by Meryl Gutterman. Meryl is Senior Counsel for ADP's Human Capital Management Group, where she provides guidance on HR best practices and employment laws impacting ADP's clients. Welcome to HRpreneur once again, Meryl. It's always great to have you on the show.

Meryl Gutterman: Thank you, Jim. It's great to be here today.

Jim Duffy: So, Meryl, let's start by talking about some proactive steps an employer can take to prepare for employee pay raise questions, beginning with understanding applicable laws. So, can you please provide some background for us?

Meryl Gutterman: Sure. To start, there are a number of laws that govern pay, and some of these laws may also impact how you handle salary negotiations or how you develop your compensation program. These include minimum wage and overtime laws. For example, federal law requires employers to pay non-exempt employees at least the minimum wage per hour, and then overtime whenever they work more than 40 hours in a work week. And then there are a number of state and local laws that also have higher minimum wage requirements and may require overtime under additional circumstances. Also, you should keep in mind non-discrimination laws. Federal law and many state and local laws prohibit discrimination in pay, so you should be auditing your pay practices regularly to ensure that they're equitable and any disparities in pay are justified and lawful.

And then also federal law and a number of state laws also explicitly give employees the right to discuss their pay with co-workers. So you should be avoiding rules or other actions that could be perceived to restrict an employee's right to talk about their pay.

And then employers should also keep in mind laws that prevent them from inquiring about an individual's pay history, under the theory that asking for salary history could perpetuate pay discrimination from a previous employer. And there are a number of jurisdictions that explicitly prohibit employers from asking about or using an applicant's pay history to make pay decisions.

Jim Duffy: Thanks, Meryl. Those laws would certainly be helpful to know when making compensation decisions. Keeping those laws in mind, how can an employer be proactive about their compensation program so that they can be prepared before an employee asks for a raise?

Meryl Gutterman: That's a great question, Jim. So, sharing how your business approaches compensation, such as how it pays and rewards its employees and how those practices align with your business's goals and values, that can help attract and motivate and retain talent. And then you can also consider highlighting total compensation, addressing both direct compensation like wages and salaries and commissions or bonuses, and also indirect compensation like health insurance or paid time off and retirement plans when you're making job offers and also in your employee communications. And you can also emphasize key points such as benefits that can help employees maintain a healthy work-life balance. And then after you communicate your pay philosophy with your employees, you can encourage them to ask questions about your business's compensation plan.

Jim Duffy: Thank you, Meryl. I see the value in having a compensation philosophy for your business, but should employers also be keeping an eye on what their competitors are offering? I'm guessing, for example, if an employee is asking about a raise, they might also be comparing their compensation with the job market's going rates, right?

Meryl Gutterman: That's absolutely true, and that's a good point. Employers should have at least a general idea of what their competitors are paying workers employed in similar situations. To help with this, employers can review external salary data from the Federal Bureau of Labor Statistics, otherwise known as the BLS, or they can also look at industry groups and vendors. And if you're an ADP client, you can always leverage salary benchmarking tools that we have to help you learn what employees are getting paid from similar jobs in their area and to help determine ideal pay ranges for open roles. And then in addition to salary benchmarking, employers should also understand inflation that's occurring in their market. And employers really need to pay attention to rates of inflation because if an employee's pay raise is less than that of inflation, the employee may feel like they're making less and their wages aren't going as far. So ultimately, having an accurate picture of the market can help you establish competitive pay rates and help employers respond to employees who contend that they're underpaid and are seeking a pay raise.

Jim Duffy: Thanks again, Meryl. The BLS is indeed a great external compensation resource. Are there others, however, internal resources that employers should consider as well?

Meryl Gutterman: Yes, employers can also benefit from using internal resources such as their own employees to stay on top of sentiment about pay and other areas that relate to the employee's satisfaction at work. So, for instance, if you receive notice from an employee that they're leaving, you can conduct an exit interview and find out why that employee is leaving the company. And exit interviews can help you identify your company's weaknesses so that they can be addressed before your next employee leaves.

And then there's a lesser known practice known as stay interviews, and that can also help you gain insight into how to retain your employees. And during stay interviews, you can ask current employees questions that address why they're loyal to the company to get an indication of what you should keep doing, and why they may consider leaving to get an indication of what changes you may want to make to your company. And stay interviews also typically include questions about what the employee likes most and least about their job, what their employer or supervisor can do to support the employee in challenging times, and whether the employee believes that their talents are being fully utilized, and what would make them consider leaving.

Jim Duffy: So, Meryl, if during one of these stay interviews an employee mentions compensation as a source of dissatisfaction and they request a raise, then how should an employer react?

Meryl Gutterman: Well, first, employers should listen to the employee and take a pay raise request seriously. And then, if necessary, ask the employee clarifying questions, such as "How much of a raise are you seeking?" or "What prompted you to request a pay raise?" But employers should make sure to avoid making promises about future pay increases. And if you can, let the employee know you will consider their request.

Jim Duffy: And once an employee asks for a raise, what should an employer consider when making that decision?

Meryl Gutterman: Well, after meeting with the employee, an employer should consider whether it makes sense to meet the employee's request fully, whether they're somewhere in between their current and desired pay that they could reach, or whether to make no change at all. Employers should take into account factors such as the market, your budget, the employee's performance, internal and external pay equity. And also consider what would happen if the employee left and what the impact would be on co-workers and your company, and how difficult it would be to replace that employee.

Jim Duffy: That's an excellent point. So what should an employer do if they find a pay raise is in fact warranted?

Meryl Gutterman: Well, employers need to make sure that they're following established pay practices and procedures. So, for instance, sometimes an employee will receive an increase in pay, but they will also take on greater responsibilities. In such cases, make sure the pay increase reflects the additional work responsibilities. And employers should keep in mind that salary and benefits negotiations that result in raises could also lead to potential inequity. So, for example, high performers who don't negotiate could receive fewer perks than employees who do negotiate. So you want to make sure that your process is equitable and develop guidelines such as negotiating within a salary range or making changes to all similarly situated employees. And as a best practice, compensation decisions should be reviewed by more than one individual so you should have a manager and maybe a member of your senior leadership team to ensure that internal equity and alignment with your compensation program is taking place. But if the employee alleges potentially discriminatory pay practices, you should consult legal counsel to determine your next steps.

Then, once a compensation decision is made, communicate the decision to your employee in person and in writing. If you're giving them their requested pay raise because of market conditions or merit, then you'll want to let them know that. If you're giving them less than they requested, you'll want to explain why, and you can tell them too that the decision will be re-evaluated annually.

Jim Duffy: Thanks, Meryl. That makes perfect sense. Now, we both know, as many of our listeners do, that employers cannot always just give employees raises. So, are there other options if raising an employee's pay isn't the right move?

Meryl Gutterman: Absolutely. If an employer can't provide a pay raise, they should consider if there are other options available that they may offer to help retain an employee. So, for example, they could consider a one-time bonus, such as a one-time retention or a performance bonus, and that would only impact a bottom line in the year that it's given. If a one-time bonus is within your budget, it can be an attractive alternative to a pay raise. Or, if an employer is looking for a non-monetary option, an employer could consider flexible work, where the employee either works from home on certain days or all the time. And this can help reduce the cost of commuting. Flexible work schedules can also help reduce employee stress and save time by avoiding rush hour traffic.

Jim Duffy: Thank you, Meryl. As always, this has been very helpful. And as I try to do, I take notes as you're answering the questions just to help to capture key takeaways. So let me run through these and please correct me if anything is incorrect. So, first, review your compensation program regularly to ensure it meets your business needs, you are aware of market realities, and it complies with all applicable laws. Item number one. Number two, additionally, be prepared to handle requests for pay raises. Third, consider financial and non-monetary options. And lastly, communicate fairly and consistently with employees when it comes to raises. So, did I capture them accurately?

Meryl Gutterman: You did, Jim. You did a great job. Thank you.

Jim Duffy: Thank you. Well, this brings us to the end of this episode, and again, thank you, Meryl, for joining us once again. We always appreciate your sharing your expertise with us on what to do when an employee asks for a raise. Presented by ADP, HRpreneur focuses on the entrepreneurs and business drivers who are shaping the growth of their companies and positively impacting the lives of their employees. With each episode, we'll bring the experts to you. We'll answer your questions and help you think beyond today so you can discover more success tomorrow. As always, thanks for listening to HRpreneur. Be well, and we hope you'll join us again soon.