Running a business means controlling the financial fate of the folks who work with you and for you, which is why many company owners find the process of determining raises overwhelmingly stressful. If you’re at the point where you need to start making some compensation-related decisions, here are a few key questions to ask yourself first.
1. Should we give out merit-based raises or cost-of-living raises?
Merit-based raises are based on employees’ performance, while cost-of-living raises are designed to help workers keep pace with general inflation. The benefit of going with the latter is that it’s easier to implement — you simply land on a uniform increase (say, three percent) and apply it to every employee’s existing salary.
Figuring merit-based raises can be more complicated, and in some cases, more expensive, but it’s also a good way of rewarding workers who go above the call of duty, as well as motivating your team to do a better job going forward. Then again, when you dish out a cost-of-living raise across the board, you often end up rewarding workers who don’t necessarily deserve an increase, so consider whether you’re willing to take that chance.
2. Are there benefits we should be offering in lieu of more money?
It’s nice for employees to be offered more money, but before you pump company resources into salary bumps, think about whether your business is lacking in key workplace benefits. If your health plan, for example, is less than stellar, you might better serve your employees’ needs by upgrading to a superior policy and offering a more generous premium subsidy to boot.
Incidentally, that sort of move might better serve your business and employees from a tax perspective. When you increase salaries, you, as the employer, are required to pay additional taxes on that money, and your employees are required to pay taxes on it as well. But when you pay for a benefit like health insurance, those taxes don’t apply.
[Related: Competitive Benefits Kit]
3. Can we actually afford to give raises this year?
Offering workers a pay boost is not only a gesture of goodwill, but a solid way to retain talent. That said, just because you might want to give out raises doesn’t mean your business can actually afford to do so. If you have pressing obligations, loads of debt or equipment in desperate need of some upgrades, you may be better off allocating that money to any of those items rather than putting it directly into your employees’ pockets.
Will you face your share of backlash if you don’t give out raises next year? You bet. You might even lose a few employees who get frustrated and decide to take their talent elsewhere. On the other hand, if you spend money you can’t afford to part with on raises and risk your company’s viability, you might land in a situation where you’re forced to lay off staff in the not-so-distant future. And when you think about it that way, you’re better off skipping raises once than creating a shaky future for your business.
Determining raises for your staff is no easy feat, so give yourself time to work those numbers out. It’s a better bet than rushing through the process and making poor decisions along the way.
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This article was originally published on The Motley Fool. It is reprinted with permission.