Understanding Pay Increases and the Average Raise

An employee smiles and raises her arms happily after learning about her pay raise.

In times of low unemployment, it’s difficult to know if the compensation you’re offering is sufficient to attract and retain the talent your company needs. The question may seem straightforward, but it warrants a closer look. For instance, what is the average raise amount, and what if you’re unable to offer competitive raises?

Tight compensation budgets are creating talent challenges for recruiters. At the same time, employers are banking on a mix of limited salary increases and “total rewards” to retain in-demand workers. People work for more than just a paycheck, but you’ll need to get creative if you don’t have the budget for the typical raise percentage.

The following 10 tips will help you get your arms around the often-confounding nature of compensation dynamics and pay raises.

1. Know the Average Raise and What the Competition Pays

Before you even start calculating which employees get how much of a pay increase, you need to understand what it will take to reward and retain your top performers. This means getting a sense of the typical raise percentage and what your closest competitors pay, and then determining how much you’re able to increase payroll.

So, what is the average pay raise amount? Raises are typically within the 3 to 5 percent range, although this can fluctuate depending on the state of the labor market. When unemployment is low and employers are hurting for talent, it may take a little more to satisfy and ultimately retain your best workers. Additionally, high-demand professions (such as those in technology) may require generous raises regardless of broader economic conditions.

2. Make the Case That the Average Raise is All You Can Offer

What separates companies with major employee retention problems from those that keep most employees satisfied with middling raises? The answer is honesty, flexibility, and transparency in financial matters.

Some employees have come to understand that a flat 3 percent raise is what is being offered. But, while you should never underplay the importance of salary, employees are staying with their employers for flexible arrangements such as working from home, professional development programs, and other incentives beyond the pay raise they may be getting.

3. Don’t Try to Curb Your Compensation Costs

Though it may be necessary to keep pay increases in the moderate range, your company will get burned in the talent market if you actually reduce raises, especially during periods of full employment. Employers should be mindful that such periods are not the time to trim compensation budgets. Payroll will always be your biggest line item, but your people are your most valuable asset.

4. Use Bonuses Rather Than Pay Raises Whenever You Can

Be generous with bonuses if you’re unable to offer an average raise amount. Employers may choose to reward employees with a bonus rather than a raise, or to supplement a lower-than-expected raise, since bonuses don’t compound over time and offer more flexibility.

Another reason to use bonuses—your competitors are. Businesses have been increasingly utilizing retention bonuses as a way to promote better employee engagement and satisfaction. Top-performing companies tend to pay bonuses more frequently than typical companies, while surveys show that a majority of workers prefer tiered, performance-based bonuses.

5. Be Mindful of Pay Compression

When enticements for new hires cause their pay to exceed that of existing employees, you’re setting the stage for tension in the workplace as incumbent employees feel as though they’re falling behind financially. This occurrence is called “pay compression,” wherein the gap in pay between longer-tenured employees and new hires is compressed to the point where your more-senior employees feel slighted.

It’s important to deconflict your recruitment and retention strategies so they don’t work against each other. This may cause you to take another look at your average raise amount.

6. Watch Out for Pay Inequality in Your Workforce

It’s important to take a step back and take in the broader contours of your payroll when considering pay raises, since even the best intentions can come back to haunt you if they result in questionable pay discrepancies amount your staff. In addition to potential liability for pay inequality, exacerbating differences between haves and have-nots within your organization can also be a culture killer.

7. Seek Counsel Regarding Pay Equity and Salary-Inquiry Laws

Depending on your jurisdiction, you may be facing new laws governing wage discrimination and restrictions on your ability to inquire about past salaries. For example, a pay equity law in Massachusetts requires companies to provide equal pay for comparable work, with limited exceptions for such things as seniority, education, experience, and required travel.

These are important to factor into your retention strategy as you don’t want to inadvertently expose yourself to a lawsuit. If need be, seek outside advice on compliance with applicable laws and regulations.

8. Don’t Rely Too Much on WFH and Flexible Schedules

It’s important to offer flexible work options wherever you can, but know that there are limits and you’ll still need to offer a competitive salary and an average raise to retain top talent. While work from home options were more of a novel benefit in the early 2000s, advancements in technology and the acceleration of telecommuting during the COVID-19 quarantine of 2020-2021 have made these arrangements more commonplace.

9. Total Compensation Statements Can be Persuasive

Using a total compensation (or total rewards) statement itemizing the cost of perks such as health insurance and a 401(k) match, can help boost at least some of your workers’ engagement. If it’s clear, employees will appreciate the package you offer. This statement should fully explain each category of compensation and all employer contributions per category. A lunch session with a handout will be more effective than an email that’s easy to ignore.

10. Beyond the Numbers, Compensation is Really About People

Employees are trying to carve out a life and support themselves (and often children or other family members). Companies have a lot of leverage, so they’re able to do things employees may not like. However, wise employers know that if they fail to offer compensation that’s perceived as fair, employees may use the only leverage they have: looking elsewhere.

Take care of your people and your people will take care of your business—it’s as simple as that.

Are You Retaining Your Top Performers?

Compensation strategies are not a one-size-fits-all proposition. They need to be tailored to your industry and your workforce, whether you’re calculating starting salaries or the average raise amount, but they also need to comply with the law. It can get complicated, which is why we’re here. Find out how to get free access to the information you need, including the latest hiring news, recruitment tips and more.

Legal Disclaimer: None of the information provided herein constitutes legal advice on behalf of Monster.