As 2024 winds to a close, employers need to strategize about various issues for the next calendar year. One of these issues is compensation — specifically, how to handle pay raises.

In its 2024-2025 Salary Budget Survey, compensation management platform provider Payscale analyzed 1,550 submissions from employees at various organizational levels in the United States and Canada. The survey found that U.S. employers plan to increase their salary budgets by 3.5% in 2025 (slightly down from 3.6% in 2024).

If your organization, like many, now prioritizes pay equity and transparency, make sure you’ve carefully considered all the factors that go into finding the right approach to pay raises.

Standardized Criteria

How employers determine and communicate raises and other compensation adjustments can affect employee morale and performance. For this reason alone, consider developing and communicating standardized sets of criteria to determine pay raises for specific positions or job groupings within your organization. (If you already do this, be sure to regularly review and revise the criteria as necessary).

By standardizing criteria, you’re less likely to wind up with significant variations in compensation among employees who perform identical or similar jobs. You’ll also help ensure that, as much as possible, pay fairly reflects performance.

In addition, standardized criteria can reduce the perception of, and opportunity for, bias. Even if untrue, the mere perception of pay inequity can dampen morale, increase turnover, and damage your employer brand with job candidates.

Goals, Longevity, Or Both

Even with established standardized criteria for raises, many employers still grapple with whether to also base pay increases on annual performance goals or longevity.

The latter is the more traditional approach. The idea is that, generally, employees’ experience with the organization reflects dedication, consistency, and high-quality contributions. In addition, using raises to reward loyalty may help reduce turnover.

However, in developing their compensation philosophies, many employers have decided that longevity doesn’t automatically correlate with high-value employees. In addition, relying on tenure alone to determine raises can lead to paying bloated salaries to staff members who don’t always develop their skill sets to match their organizations’ changing needs.

For these reasons, and perhaps others, many employers now tie employees’ raises to mutually agreed-on performance goals. If you decide to take this route or are already doing so, be sure goals are clearly communicated, measurable, and challenging, yet attainable.

Of course, many organizations look at both longevity and performance when determining raises. Whatever approach you choose, make sure your compensation philosophy and policies comply with all applicable laws and regulations. Consult a qualified attorney as necessary.

Schedule Of Increases

Although many employers issue raises during or immediately after annual performance reviews, other schedules can make sense. For example, if a position typically experiences high turnover, you might boost retention by offering new hires a modest increase after only several months. No matter what the schedule is, let new employees know when they can expect their first review and opportunity for a raise.

You also should have an established policy for interacting with staff members who ask for raises outside the regular schedule. Some employers assess these requests on a case-by-case basis, while others flatly prohibit them. If a raise isn’t feasible and you want to retain the worker, look for nonfinancial incentives that might resolve the situation, such as a change in job title or more flexible working hours.

Compensation Complexity

There’s no doubt about it; compensation has gotten complex. Every employer needs to find a competitive, equitable, and transparent approach to paying their employees. Contact us for assistance capturing and analyzing your organization’s compensation costs, including the impact of annual or more regular raises.