When an employee asks you for a pay raise, it’s easy to feel taken off guard.
At first, you may have more questions than answers.
What’s the best way to respond? Should you provide an answer right away? How can you avoid a disastrous interaction when the answer is no?
Don’t let these questions overwhelm you. Follow these five steps for the best possible outcome – regardless of the scenario.
1. Let your compensation philosophy guide you
If employees are frequently approaching you and inquiring about raises, the most likely culprit is that you lack a solid compensation philosophy.
A compensation philosophy defines what’s important at your company when it comes to managing pay. With guiding principles on the various elements of compensation, it gets your company aligned on things like salary, bonuses, market competitiveness, pay equity compliance, annual merit increases and other pay raises.
For example, your company might determine that your pay is driven by performance, based on an annual performance review cycle, and you pay at the 50th percentile of the market rate.
Regardless of whether your company offers annual merit increases, you should – at the very least – annually review employee salaries to ensure employees are being appropriately compensated according to your compensation policy. By doing so, you can greatly reduce the likelihood you’ll be approached by your staff with raise requests (and avoid the disruptions).
2. Listen to your employees’ pay concerns
When your employee has drummed up the courage to ask for a pay raise and approaches you to discuss the matter, your initial reaction should be to simply listen carefully to your employee’s request.
Not only will this help to make your employee feel appreciated and heard, but it will also give you time to understand why they’re asking for a raise.
There are a number of possible scenarios, but here are the most common motivators behind an employee asking for a raise:
- Feeling overworked and undervalued
- Assuming added responsibilities or multiple roles
- Finding out another employee earns more for the same job (or maybe even for a different job)
- Looking up data on the Internet and thinking they are underpaid
- Not getting a pay raise for several years
After hearing out your employee, you might say, “Thank you for bringing this information to my attention. I’d be happy to look into this further. Please allow time for me to do some research, and I will get back to you in a week to continue our discussion.”
You should never give an immediate response, even if you think the employee doesn’t meet the criteria for a raise. Do your research first.
3. Consider all the variables
As you think about employees’ requests, you’ll need to analyze a variety of factors.
Here are just a few areas that should influence your decision:
- Your company’s compensation philosophy
- Overall salary budget
- Up-to-date competitive market data
- Nature of job duties and responsibilities
- Special skills, education or certifications
- Internal equity
- Past performance
Every company will apply different weight to each of these areas depending on what it values most. For example, say your organization is administrative in nature and institutional knowledge is vital. Tenure might be a deciding factor.
Or, if you’re in an industry that’s extremely competitive and turnover is high, you might place more of an emphasis on performance. It’s all about your organization’s needs.
Not all raises are based on tenure and performance. There may be certain circumstances, in highly competitive industries or among very competitive jobs, where a market adjustment is warranted. This typically happens when an employee is being paid below what the market dictates, and a pay raise may be justified (and necessary) to retain them. In this instance, you should look at any other employees who are in this particular position to maintain pay equity.
In any case, your company should have sound processes for administering compensation based on the organization’s philosophy.
Also, keep in mind that if an employee presents an individual circumstance or hardship to justify their pay raise request, it should not be a part of the compensation decision. A personal situation should never be a motivator behind a pay raise.
Instead, consider helping employees like this through coaching. Help them understand how they may be able to earn more money in the future by obtaining different skills, earning a degree, or through a particular career path.
4. Deliver the news gracefully
After you’ve analyzed all appropriate factors, it will be time to deliver either good or bad news to your employee. Regardless, this should be done in person so you can thoroughly explain the process behind the review and how the decision was made.
When you’re delivering good news – that pay raise is on its way – it’s a perfect time for positive reinforcement around their performance and your expectations moving forward.
For example, you could say, “We did our research, and we feel like you deserve a raise based on your performance, tenure and experience level. Thank you for all you’re doing. We really appreciate your contribution, and we look forward to seeing the same level of performance in the future.”
Although you may have the opportunity to grant some raises, chances are, not every employee who asks will qualify.
To these employees, you might say, “I’ve reviewed your request and, based on several factors, you aren’t eligible for a raise at this time.”
You could then elaborate with something like, “I evaluated your performance appraisals and competitive salary survey data, as well as your current and past experience. Our pay rate is considered appropriate within our salary guidelines. I’m glad you were comfortable discussing this matter with me, and I encourage you to bring any concerns you have directly to me.”
Turning down a pay raise request doesn’t always have to be negative. Helping the employee understand why they weren’t given a raise can build trust with them and make them feel more comfortable in approaching you with tough questions in the future.
It can also be a good time to discuss career aspirations and where they see themselves in the future. Investing the time to talk to your employees, even when it means having difficult conversations, can be well worth it.
5. Be transparent when it’s not in the budget
There might be occasions where you feel an employee deserves to be paid more, but a raise is not in the budget.
In these situations, transparency is important. You want your employee to feel valued, and being open with them – as much as you can – will be critical in this process.
For example, you might say, “While we value and appreciate all your hard work, we’re unable to grant a pay raise at this time due to the budget.”
Consider providing non-monetary rewards to employees in these cases. Things like extra vacation time or opportunities to work remotely might be a good alternative. However, be aware that other employees may notice these added perks, and you must be prepared to answer any questions they might have about the arrangement. Treating employees differently can lead to discrimination claims, so you need to be able to explain the legitimate basis for any differences.
Move forward with improved employee relations
Bottom line: When an employee asks for a raise, you should be prepared to handle a multitude of different scenarios – whether you’re able to grant the request or not. If handled properly, these types of discussions can pave the way toward better communication, as well as increased employee performance and morale.
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