Hiring new team members? 5 Important Decisions to Make Before Giving Raises

Roll of $100 bills and the word "hire"

Among all the challenges you face as a business owner, few things are more difficult to approach than employee compensation. Between establishing base wages and salaries, distributing bonuses, and giving out raises, you’re bound to get a headache or two managing it all. That said, these issues cannot be ignored. Your people might like working for you and your business, but they won’t stick around if they don’t feel fairly compensated, especially if they can find a better paying job elsewhere.

Employees expect their pay to be fair from the beginning and increase over time (beyond just keeping up with inflation). Indeed, without delivering this expectation to new hires, businesses would have a hard time getting anyone on board, and developing leadership talent would be impossible. The hard part for you is figuring out how to broach this subject, how to decide who gets a raise (and when and why), and how to keep your people from turning on each other in favor of the almighty dollar.

So, if you’re hiring new team members, here are five important decisions to make before giving raises.

What to Do Before Giving a Raise

1. Create a Compensation Structure

As your business grows and you hire more people, you need to establish a system of compensation that works best for you. Some companies keep things simple with a one-size-fits-all solution that delivers the same percentage pay increase to every employee on a regular basis (usually annually). While this approach is equitable and easy to manage, it can negatively impact productivity and employee morale, as there is no clear correlation between performance and pay.

Other businesses might decide that performance and compensation management go hand in hand. These companies conduct regular performance reviews for each employee and give out raises based on how well they’ve done. All employees might receive raises, but the best performers will get a higher pay bump. This method can help motivate individuals to work harder and remain engaged, but it can also create tension between employees, splintering unity.

Both approaches have their merits, and you may decide to create a system that falls somewhere in between. Just make sure that your compensation structure benefits your employees and business as a whole.

2. Match the Market

No business exists in a vacuum. You must pay attention to what your competitors are doing if you plan on thriving in your industry and retaining your top talent. Companies that offer the best compensation packages tend to have a competitive edge. You may need to work with a business coach to give you a broad perspective of your industry’s outlook on compensation so you can match or exceed those expectations. This will allow you to attract and retain the best people.

3. It’s All About Value

When budgets are tight, giving out raises might seem like a burden. Indeed, doing so might result in short-term losses. However, you have to think long term and focus on building your business’ value over time. Your people bring value to your company, after all, and without them, you wouldn’t be able to grow or thrive. By reciprocating and delivering value to your employees, you’re creating a feedback loop that will propel your enterprise forward. In this way, compensating your people accordingly is a major component in talent management and succession planning. If you want your organization to be its very best and last for years to come, you need to invest in your people.

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4. Exercise Care With Pay Compression

As you calculate wages for new hires and percentages for raises, be mindful of pay compression. This phenomenon occurs when newcomers make the same amount as those who have been with the company for a long time. Not only might this offend long-standing employees, it may actually devalue their position, as the newcomer’s wage accounts for inflation while theirs does not. In other words, a dollar is worth less today than it was a year ago, and even less so than 10 years ago, and so on. 

Pay compression can toxify your workplace culture in more ways than one. Therefore, it’s important to adjust all salaries for inflation and always factor in longevity so senior employees are rewarded for their commitment and experience.

5. Be Upfront About Pay When Hiring

When seeking employment, people appreciate transparency. Companies that clearly outline their compensation packages and potential for growth often entice the best people. So, if you’re looking for top talent, don’t shy away from discussions around pay. This includes mentioning how, why, and when raises are dished out. The more open you are about these matters, the better, as it establishes expectations and minimizes confusion.

There’s nothing easy about raises. But if you take your time and think in the long term, you can develop a compensation system that attracts top talent, keeps your best people from leaving, improves your culture, and ultimately adds value to your business.

At Leadership Resources, our purpose is making the impossible possible through people. We aim to do so by helping individuals develop patterns of success that will decrease stress levels and maximize productivity. Contact us here to learn more about what we do and how it can help your business succeed and grow.

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