Posted by Neha De
October 2, 2020 | 5-minute read (989 words)
When your business grows, chances are strong that you've got a team of people behind you who help contribute to the success of the company, and you probably want to show your gratitude for their hard work. Giving raises and/or bonuses is one of the best ways to show your staff members that you appreciate their dedication. Not only does this motivate them, it may also help your company in the long run.
Business owners often use raises and/or bonuses as a way to increase retention as well. By offering a competitive salary, they try to ensure that their employees will not look for work elsewhere, which prevents turnover. This saves them the trouble of having to find and hire new talent.
Raises and bonuses incentivize employees, boost morale and ensure that team members feel rewarded and appreciated. While raises are a permanent increase in payroll expenses, bonuses are a variable cost and therefore give companies greater financial flexibility. Additionally, bonuses are usually tied to production or sales volumes to incentivize employees and help businesses boost their profits during peak times. However, company owners need to measure the effect of raises and/or bonuses on their company’s profit margin.
However, before offering raises or bonuses, it’s important to establish criteria for them; that is, what benchmarks must be met in order to increase pay and how much you are willing to compensate. You can then ensure that you have a system in place that can accurately store employee information and their performance details (which you can reference back to when it’s time to give a raise/bonus).
Some businesses give across-the-board raises each year, with every employee receiving the same percentage. For others, the amount of raise offered can be a set number based on each employee’s salary. An annual raise helps employees plan and budget for their monthly expenses and keep up with the rising cost of living.
Depending on the nature of business, a small percentage raise every year can be less expensive than paying bonuses, which may fluctuate with sales or production numbers. However, annual raises are a permanent expense in the cost of doing business. Therefore, it’s important that you work out whether your business is generating enough revenue and monthly cash flow to meet the increased payroll expenses.
When to give a raise: When you should give your employees raises really depends on you and how your company is performing. While some business owners give annual raises, others do it on a quarterly basis. Then there are those that give their employees raises when they feel the staff members have earned them (performance based). Here are various scenarios that could warrant a pay raise:
- Performance Based: These come into play if the employees are going above and beyond what they are expected to do at work — sometimes even before the deadline — and they are constantly looking for ways to help grow the business.
- Cost of Living: This type of raise is a direct result of the economy and is typically done across the company. When the cost of living goes up, you may give your employees a raise so they can keep up with rising inflation.
- Annual: This type of raise is given annually to all employees and is usually linked to their performance.
- Merit Based: These raises are given when an employee learns a new skill set; for example, when an accountant becomes a Certified Public Accountant (CPA). Merit-based raises are usually only given to staff members based on their performance and company goals.
- Length of Service: Employees who work at organizations for long amounts of time, say, 10 or 20 years, often get periodic, milestone raises.
Long-term employees with good track records who have not been eligible for pay increases (often because they have reached the top of their pay brackets) may also be rewarded with bonuses. This practice provides them with an incentive, without locking in a fixed amount that has to be given every year. Bonuses are mostly discretionary on the part of management, and may be given only when the employees’ performances warrant them.
Many business owners find bonuses to be more financially feasible since they’re a variable cost. And since the compensation is variable, the amount of bonus can be reduced or eliminated completely if business conditions make it difficult or impossible to justify them.
However, while the ability to avoid or minimize the expense of bonuses is attractive to business owners, it can be damaging to employee morale. Most employees rely on their paychecks to pay bills, and unpredictable fluctuations can be disruptive and cause staff members to seek employment elsewhere.
Because of this, as a business owner, you must explain to your employees that sometimes, reducing expenses can not only help the company save money but also can save jobs, especially when business temporarily slows down.
How Much Should a Raise or Bonus Be?
Deciding how much of a raise to give an employee can be challenging. By some estimates, pay raises typically range anywhere between one and five percent, but the average is about three percent. The overall raise percentage is dependent the employees’ current compensation and how much they are adding to the business.
Other factors that can be considered include what the competitors are paying and how long your employees have been working at your firm.
When considering bonuses, you should first figure out the minimum level of financial performance that your company needs to reach before distributing bonuses. Then, determine how much of the profits you’re willing to share with your employees. It’s best to come up with a plan to set aside some money throughout the year to fund bonuses.
One good way to offer bonuses is by setting goals that directly link increased sales and profits to bonus payouts. Consider creating tiers for different performance levels.