Considerations on How to Calculate Pay Increase Percentages
Workers can often be overly optimistic about pay increases. Employers are balancing tight budgets with these expectations and efforts to retain, reward and motivate their people.
Leaders and workers may encounter a troubling disconnect as they approach compensation talks. As employers consider how to calculate pay increase percentages, they must balance expectations with tight budgets. At the same time, they must ensure their compensation efforts retain, reward and motivate their people.
A sharp disparity in pay increase expectations
A difference between expected and actual increases is understandable, says Diana Yarbrough, division vice president of HR at ADP. "With increased inflation, employees see their take-home pay buys less, so they want a salary increase that gives them the same purchasing power," she says.
Yarbrough adds that part of the gulf between employees' and employers' views on pay raises may also be due to the salary increases many companies made to attract and keep their people during the period dubbed the Great Resignation (the first two years of the COVID-19 pandemic).
"Now," Yarbrough explains, "employees say, 'I'm worth more because you have to pay more on the outside.'"
However, job responsibilities and productivity may not have changed. Yarbrough adds, "If you raise everybody's salary, customers may not be able to afford your products or services. As an employer, you are looking at the long-term impact on salaries related to productivity and revenue. At this time, employers must balance wage growth with the predictions of future economic changes."
How to calculate pay increases in today's economy
Companies look at several factors as they strategize salary increases, Yarbrough says, including the competition's hiring wages.
Many states and cities have pay transparency laws requiring states to list the salary in the job description. In addition, companies can track their applicants' asking wages. "This can also help determine the wage expectations for internal employees," Yarbrough adds. Knowing the desired salaries and their budgets, employers can make offers with more confidence.
As leaders look at how to calculate pay increase percentages, they must factor in maintaining equity and avoiding salary compression issues, Yarbrough says.
"Pay equity is a big focus area," she points out. "Understanding the current employees' contributions and the work's impact on the business's revenue is important." She adds that when companies can make productivity improvements for current employees, they can raise wages and not have to hire as much externally, which reduces pay compression.
Other ways to evaluate the big picture of compensation
When companies look at pay increases, they usually see it as a percentage increase of base or hourly pay. But Yarbrough suggests leaders expand that view of a compensation increase and encourage their employees to do the same.
"One way to consider an increase in net or take-home pay is by providing more employee benefits or incentives contributions," Yarbrough explains. "Another option is to look beyond base and include incentives, commission, 401(k) contributions and other benefits."
Although some incentives are tied to individual performance, organizations can offer additional money when the company succeeds. Yarbrough says these incentives can be connected to measurable aspects, such as growth, revenue or profitability. The money companies make by achieving goals can help fund their profit-sharing initiatives.
Companies that may not have budgets to offer high salary increases can look at ways to be creative with compensation such as offering a one-time bonus, additional paid leave or a more flexible work arrangement.
Salary increases are a longstanding sign that a company values its people. But when budgets for salary increases are small, leaders must rethink how to calculate pay increase percentages. At the same time, they want to keep and motivate valued employees. To maintain this balance, leaders must set expectations by being appropriately transparent about the performance budget and the company's compensation approach.
Leveraging transparency and creativity in the process
Companies can't always give the salary increases they want. However, leaders can be transparent in creating, understanding and setting expectations. They can explore new ways to offer more take-home pay. And they can show they value employees through recognition and development opportunities.
The process doesn't have to be complicated, Yarbrough says.
"Let's share the pay philosophy. Let's be visible and take action to minimize compression and perceived inequities. Let's share that in a reasonable way as part of the overall compensation story," she says. "Based on that information, employees will make their personal decisions, but we can be consistent and honest with our answers."
What's next?
Now more than ever, if your employees can't find the right fit where they are, whether that's with compensation, benefits, culture, engagement or career path, they are willing and able to go somewhere else. Businesses must evolve to survive and thrive. The question is how. Learn how to design a people-centered workplace.
