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When should employees receive raises and bonuses?

Posted by Shivali Anand

November 10, 2021    |     5-minute read (886 words)

When your company expands, the odds are you have a team of individuals who contributed to its success and to whom you want to express gratitude. One of the best ways to show employees how much you value their hard work is through pay raises or bonuses. Doing so not only motivates the recipient, but it can also benefit your organization in the long term.

Raises and bonuses are frequently used by business owners to enhance employee retention. They want to keep employees from looking for work elsewhere by paying reasonable compensation, thereby reducing turnover and saving the time and energy of having to recruit and hire new employees.

Raises and bonuses also motivate employees, enhance morale and help ensure that everyone on the team feels appreciated. While salary increases are a fixed cost, bonuses are a variable cost that allow businesses to be more flexible with their finances. Bonuses are also typically linked to production or sales to motivate staff and assist firms in increasing profits during peak periods. However, business owners must assess the impact of pay hikes or bonuses on their profit margin.

Before granting a pay increase or bonus, define their criteria, such as what measures must be completed to boost pay and how much you're ready to hike compensation. Make sure you have a system in place to record employee information and performance data so you can refer to when it's time to issue a raise or bonus.

Handling raises

Every year, some companies give pay increases to all employees by the same percentage. Others may provide a fixed amount pay increase based on each employee's compensation. Employees may plan and budget for their monthly costs and keep up with the growing cost of living with a yearly pay increase.

Depending on the nature of the firm, a slight percentage rise per year may be less expensive than offering bonuses, which may change with sales or production results. Annual increases, on the other hand, are a fixed cost so you must determine if your company generates enough income and monthly cash flow to cover the additional payroll costs.

When to offer a raise: When to grant raises to your staff is dependent on your company's performance. Some business owners provide annual raises, while others give raises every three months. Others give raises to their employees when they believe they have earned it (a method that is also referred to as “performance-based”). 

Here are several instances in which a pay increase could be warranted:

Performance-based: When employees go above and beyond what is required of them at work — sometimes even before the deadline — and search for ways to help the company develop.

Cost of living: This is a direct economic outcome and is usually applied to the entire firm. When the cost of living rises, you may decide to offer your staff a raise to keep up with inflation. 

Annual: All workers receive an annual raise that is generally connected to their performance.

Merit-based: Merit raises are granted when an employee acquires a new skill set, for example when an accountant obtains CPA certification. Merit-based increases are generally only granted to employees who perform well and contribute to the company's goals.

Length of service: Workers who have worked for a company for a long time, say 10 or 20 years, are sometimes given milestone raises.

About bonuses

Individuals who have been with the company for a long time and have an excellent track record but have not been eligible for salary raises (typically because they have reached the top of their pay bands) may be eligible for bonuses. This method offers them an incentive without requiring businesses to pay a fixed sum every year. Bonuses are primarily at the discretion of management.

Bonuses are more financially appealing for many business owners not only because they are a variable expense, but also because if the incentive is inconsistent, it can be lowered or withdrawn entirely if economic conditions change. While the flexibility to eliminate or reduce bonuses is appealing to business owners, it can be detrimental to employee morale. Most staff rely on their paychecks to meet their bills, and unpredictably fluctuating compensation can drive them to look for work elsewhere.

As a result, as a business owner, you must explain to your staff that cutting costs is sometimes needed to help the firm save jobs, mainly when business is in a lull.

What should the value of a raise or bonus be?

It isn't easy to know how much of a raise to give an employee. But according to some estimates, pay hikes can range from 1% to 5%, with the average being about 3%. The total increase percentage is determined by the present salary of employees and the value they provide to the company.

Other things to consider include what your rivals are paying and how long employees have been with your company.

Before awarding bonuses, determine the minimal degree of financial success that your organization must achieve. Then figure out how much of the profit you're willing to share with employees. It’s best to devise a strategy for putting money away for bonuses throughout the year.

Setting goals that explicitly tie higher sales and profitability to bonuses is an excellent strategy. Consider developing tiers for various degrees of performance.

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