Pay and recognition are two of the most important factors that impact employee morale, performance and growth. If your business isn't keeping up with market trends, you can run the risk of losing talented employees and turning away top prospects.
A recent report by WorldatWork indicated that workers on average will receive a 3.1% pay raise in 2014 as compared to 2.9% in 2013. The results of this survey are just an example of one of the many factors that employers should consider when determining employee raises for the upcoming year. Let's look at a few others.
1. The company's overall performance and budget
Most well-managed businesses actively optimize their company budget for the upcoming year according to current and expected growth. Depending on the business, a large or small portion of the gross profit will be allocated to salaries for the upcoming year. Typically, the larger the overall company growth rate, the greater the percentage of salary increases, with all other expenses being relatively equal.
For instance, if your company grew gross profit dollars 12% year over year, a mid to high single-digit average salary increase will likely be feasible, while still generating positive cash flow.
Now, how you allocate the salaries according to divisions within the company will likely also be based on each group's performance. This may be difficult for divisions that are cost centers such as accounting and product development as they don't directly contribute to growth or bottom-line improvements.
To solve this problem, it's best to apply a methodology for allocating salaries across divisions within the company. We'll cover this in a bit. It's also important to acknowledge that overall budgets are subject to changes as employee evaluations and other factors may warrant it.
2. The employee's contributions to the firm
Once you've set a company budget, you'll need to review each employee's performance. Theoretically, the employee should have set a list of goals and objectives for the year that will be very useful for evaluating performance. I would encourage companies to rank their employees and set ratings such as below-average, average, above-average and exceptional. Rankings and ratings are helpful in distinguishing between employees and defining various levels of employee contributions for the year. For instance, a company that grew gross profit 12% may incorporate salary increases in increments of 0%, 3%, 6% and 9% in accordance with each employee's rating.
3. Competitor salaries
If you are assessing salaries in relation to only company specific factors, you're bound to lose employees to competitors. Be cognizant that most employees are always comparing their salary to what else is offered in the marketplace. You may not know the exact raises and salaries your competitors give their employees, but you should have an idea. Use industry checks and sources to assess competitor company performance and salaries. You can utilize that data to adjust your company's salary increments and potentially award top performers a greater raise than the competition. If you can't offer salaries that are at or exceed your competition, then there may be other options such as providing better employee benefits and work-life balance programs than competitors.
4. Macro-economic factors
Most employees are aware of both local and national economic conditions. For instance, a depressed economy with muted growth can certainly factor into employee expectations as it's likely that most will understand when little to no raises are provided during that period. Still, cost-of-living changes need to be incorporated in your company's compensation model. If salaries aren't increasing while average rents are at a high rate, you can rest assured that many employees will begin considering other employment opportunities.
In the end, it's important to have an understanding of all of these factors when determining salaries and raises. For almost all companies, employees are the engine that drives growth, so you should make sure you keep them happy.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Ryan Himmel, CPA and registered securities analyst, is the founder and CEO of BIDaWIZ.com, an online marketplace where small businesses and entrepreneurs can obtain trusted answers to finance and tax questions from licensed professionals. Ryan has been quoted in The Wall Street Journal, Forbes, Fox Business and Crain's New York, among other publications. Ryan also regularly contributes to the community with his finance and tax blog. Contact Ryan at firstname.lastname@example.org,on Twitter at @BIDaWIZ and on Google+.