📺 Stream EntrepreneurTV for Free 📺

8 Reasons Giving Your Employees a Raise Will Hurt Your Business Flex schedules and an inspiring work environment may be more effective in motivating your employees than a higher salary.

By John Rampton Edited by Dan Bova

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Hero Images | Getty Images

Employees expect the occasional pay raise. It's a way to recognize and reward them for all of their hard work and can reduce employee turnover. At the same time, giving your employees raises shouldn't be a decision that you make lightly. While there are advantages to employee raises, it can also backfire and actually hurt your business.

1. Your business can't afford this additional expense.

One of your primary responsibilities as a business owner is to decrease overhead, not increase it. This may not be an issue when times are good. But, there are a number of outside factors that can harm your cash flow, such as a sluggish economy, a new competitor taking away customers, being in a seasonal industry or unexpected expenses like replacing broken equipment.

Simply put, your business may not have the funds available to give your employees a raise. This means that if you do give your employees a raise you're going to have to find that money somewhere, like hiking up your prices or taking out a loan. Solving the problem temporarily may throw a monkey wrench into your long-term plan.

Related: 3 Reasons You Should Increase Employee Pay Now

2. Money doesn't always equal happiness.

As cliché as it sounds, money doesn't make people happy. Take Millennials, for example. They prefer to work for organizations that share their values, encourage a healthy work-life balance, give them an opportunity to grow and provide them with a sense of purpose instead of a high-paying salary. That may seem too demanding, but instead of offering raises, businesses can attract top-level talent by being socially responsible, strong leadership and perks like flexible schedules, a wellness program or bringing their dogs into the workplace.

3. It can lower morale.

Deciding to give your employees a raise across the board may seem like a great idea in theory, but it can actually backfire since you're no longer recognizing the employees who go above and beyond. That can lower morale because the employees who are getting away with the bare minimum are now being rewarded like your All-Stars.

Furthermore, this can lead to "pay compression" -- which is when new team players are earning the same amount as your long-time employees. Again, this doesn't help with morale in the workplace.

In fact, when Gravity Payments raised the minimum salary at the company to $70,000, two of the "most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises."

Related: How to Institute a Profit-Sharing Program

4. It can lower productivity.

When the only incentive that you offer your team is money, they become more focused on how much they making instead of the quality of their work. This in turn not only pits employees against each other, it decreases your business's overall productivity. After all, why should they hustle when you just gave them a raise for an average work performance?

5. It decreases your workforce.

When it comes to hiring, you definitely want to find the best talent that fits the culture of your business - even if that means that they're juggling multiple roles. That's not a bad thing when you're a startup or small business that just opened. But, what happens when you need to bring in more employees so that you can scale properly? You may not have the resources to hire new team members because you've already dedicated too much money to your current team.

Now you're asking you're already small team to push themselves even harder and do jobs that they weren't hired to do. How long do you think that they'll be able to keep up with these demands before getting burned out?

Related: 4 Takeaways From the Rise and Fall of Nasty Gal

6. It may alienate customers.

This was already alluded to, but in order to cover the costs of employee raises, you'll have to start bringing in more cash. That could lead to you raising the prices for your goods or services. That was also a situation that Gravity dealt with. According to The New York Times, "a few customers, dismayed by what they viewed as a political statement, withdrew their business. Others, anticipating a fee increase — despite repeated assurances to the contrary — also left."

There's a time and place when raising your prices is warranted. But if it's simply to cover the cost of employee raises, you can expect your customers to get pretty upset about that.

Related: Small Businesses That Encourage Tipping Are Killing Their Brand

7. It impacts your work-life balance.

One final mention of the backlash that Gravity experienced. CEO Dan Price had to lower his salary, rent out his home to cover expenses and make end's meet, and spent more time working even harder.

As a business owner myself, I can't imagine the stress and impact that that decision has had on his work-life balance. While working more for almost nothing is part of the journey that entrepreneurs and business owners must endure for a period time, it's also important for us to have a healthy work-life balance so that we stay focused, dedicated and energized. As selfish as that sounds, I'm not willing to sacrifice that in exchange for employee raises.

8. Performance bonuses and merit raises don't work.

According to a study conducted by Willis Towers Watson, incentive pay plans don't work. In fact, one-third (32%) of the executives surveyed for the study believe that their programs are "effective at differentiating pay based on individual performance."

Additionally, half stated that annual incentives, such as bonuses for top employees, don't make any difference in how well people do their jobs, while only one in five (20 percent) think that merit pay "drives higher levels of individual performance" in their companies.

As mentioned above, offering perks like flex schedules and an inspiring work environment may be more effective in motivating your employees than a higher salary. I've found this the case at my company Due.

Before giving your employees raises, first make sure that you're able to afford this additional expenses and that you explore alternatives to motivate them. While they certainly deserve a fair wage you want to make sure that the circumstances are right so that raises won't come back and haunt your business.

John Rampton

Entrepreneur Leadership Network® VIP

Entrepreneur and Connector

John Rampton is an entrepreneur, investor and startup enthusiast. He is the founder of the calendar productivity tool Calendar.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

These Coworkers-Turned-Friends Started a Side Hustle on Amazon — Now It's a 'Full Hustle' Earning Over $20 Million a Year: 'Jump in With Both Feet'

Achal Patel and Russell Gong met at a large consulting firm and "bonded over a shared vision to create a mission-led company."

Side Hustle

How to Turn Your Hobby Into a Successful Business

A hobby, interest or charity project can turn into a money-making business if you know the right steps to take.


Want to Be More Productive? Here's How Google Executives Structure Their Schedules

These five tactics from inside Google will help you focus and protect your time.

Business News

These Are the 10 Most Profitable Cities for Airbnb Hosts, According to a New Report

Here's where Airbnb property owners and hosts are making the most money.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.